Difference between Wage Garnishment and Bank Levy: What you need to know?

If you owe federal back taxes, the law empowers the IRS to take extra-ordinary measures to recover these taxes by claiming your known assets. This is likely to happen if you have not taken steps to explain your circumstances and/or set up a payment plan if you are unable to pay the taxes in full. Bank levies and wage garnishments are two methods that the IRS can use to recover taxes owed by individuals or businesses. Most people mistake one for the other, and yet they don’t operate in the same way. Learn more about the differences between bank levies and wage garnishments in the article below.

What Is a Bank Levy?

An IRS bank levy is a legal process of seizing an individual’s money (in a bank account) to recover the person’s tax liabilities (tax, interest and penalties). The bank must comply with the IRS and will often freeze your account until you have sorted out the liability with the IRS. The IRS can freeze and enforce a levy on any type of bank account, including overseas bank accounts. Bank levies are usually a last resort for delinquent tax evaders, and they tend to occur as a one-time event. The IRS will seize the amount that satisfies your tax liability, and they can seize all the funds in your account. If the funds in the account are insufficient, the IRS can move to recover other assets, including homes, vehicles, and other personal property. Before enforcing a bank levy, the IRS issues a levy notice to the taxpayer, stating that they have ignored or defaulted on their tax repayment plan. The bank levy may persist to all monies coming into the bank account until you repay your tax liability in full, or the statute of limitations on the debt expires.

What Is A Wage Garnishment?

Conversely, wage garnishment does not happen as a one-time event, although it is also enforced to repay tax liabilities. With this method of tax recovery, the IRS approaches your employer to deduct a portion of your earnings before they even reach your bank account. This recovery continues until your debt is paid in full, or you take steps to prevent the garnishment order/settle the debt. Unlike bank levies, you can contest a wage garnishment order. If you find yourself facing wage garnishment, it is best to hire a tax relief professional, as they can help you negotiate with the IRS to prevent extreme action. For example, when negotiating an Offer in Compromise (OIC), the IRS must cease collection efforts until the process is complete – whether or not the taxpayer succeeds.

What to Do About Bank Levies and Wage Garnishment

Once you receive a notice from the IRS stating their intention to enforce a bank levy, it is best to contact a tax relief professional and find out your options. Such options include pursuing tax relief programs such as:
  • Tax installment agreement – pay in manageable installments
  • Offer in compromise – pay a fraction of what you owe to clear the debt
  • Currently Not Collectible status – put temporary reprieve until you are in a better financial position
  • Penalty abatement – remove the penalties for nonpayment with valid reasons
A tax professional will assess your current and future financial obligations and advise you on the best way to negotiate with the IRS. They can also make the applications and negotiate on your behalf to maximize your chances of getting a suitable outcome. 

Find Help for Your Tax Liability

The worst thing you can do, whether facing a bank levy or wage garnishment, is to ignore the notice and do nothing. Instead, contact our reputable and experienced tax relief professionals to work out the best way to deal with your tax debt. Call us today to schedule your initial consultation.

Wage Garnishment: How It Works and What You Can Do

Wage garnishment is a court-ordered process that mandates your employer or bank to withhold a portion of your earnings/funds in your account and remit directly to a creditor. This happens until the debt is paid or you have resolved other obligations/conditions set by the court. Wage garnishment is quite common – one study revealed that over 7 percent of 13 million employees assessed had had their wages garnished. Common reasons included consumer debt, student loans, tax penalties/levies, and child support. Even when subjected to wage garnishment, you have certain rights and limits to be observed, and there are steps to follow to reduce the effect of wage garnishment. Learn more in this article.


How Wage Garnishment Works


In most cases, the creditor must sue you for nonpayment in court to receive a court order to institute wage garnishment. However, if you have tax debt, outstanding federal student loans, or child support, the creditor can send a notice to force garnishment even without the court order. Once the notice is served, garnishment begins within 5-30 days according to the details of the notice. In some cases, you may have to pay interest on the debt and court fees. Wage garnishment happen in two ways:

  • Wage garnishment – this happens to people in formal employment. The creditors legally require your employer to remit a portion of your earnings for debt repayment
  • Nonwage garnishment – this happens to people in non-formal employment. The creditors legally require a bank to remit funds in your account as a bank levy for debt repayment


Caps on Wage Garnishment


There are federal limits to the amounts that a creditor can request during wage garnishment. This is done on disposable income, which is the amount left after statutory deductions. It happens as follows:

  • Debt Cap on Garnishment
  • Common consumer debts (credit card, medical bills, unsecured loans, etc.)
  • The lower of 25% or the amount above (30 x federal minimum wage). Garnishment is not allowed if weekly earnings are below (minimum wage x 30)
  • Alimony and child support
  • 50% if you support another spouse/child; otherwise, 60%. A further 5% may be imposed if payments are delayed beyond 12 weeks
  • Tax levies/debt Up to 15% as determined by the IRS
  • Federal student loans 15%

States also impose state exemptions and limits on wage garnishment. Non-wage garnishment is less restricted and regulated, but it is less common.


What Can You Do?


Even though you have legal rights in wage garnishments, most states require that you are aware of them, and the onus to exercise them is on you. Some common rights include:

  • You must be legally notified of the garnishment
  • You can dispute inaccurate information or wrongful debts
  • Certain incomes cannot be subjected to garnishment, e.g. veteran’s benefits, disability, or social security. However, they could still be seized from your bank account
  • You can’t be fired for one garnishment, but this protection ceases for multiple garnishments

If you believe a garnishment judgement was issued erroneously, it is possible to challenge the notice. Read the notice carefully to ensure the information is accurate. Next, consider the amount to be deducted and how it affects your finances. It may be helpful to consult an attorney, tax relief professionals (if the debt is tax-related), or your local legal aid. With a professional’s help, you may challenge the judgement, negotiate a different settlement with the creditor, or accept the garnishment. You can also repay the debt in lump-sum to ease/prevent the garnishment. It is also helpful to also be honest with your employer about the circumstances behind the garnishment. This prevents your employer from drawing a worse conclusion and penalizing you for it.


Conclusion


Creating a budget and staying on top of your financial obligations is the best way to prevent wage garnishment. However, if you find yourself in this situation, a professional can help you to navigate it so that you are not affected too adversely. Do you need help to challenge or deal with wage garnishment? Contact us today to take advantage of our tax relief services and map your journey to better financial health.


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