Wage garnishments for tax debts are more common than you might think. For instance, according to the President’s official 2016 Fiscal Year Budget, the federal government collected a whopping $56 million from wage garnishments alone in 2014. So, if you get a notice of wage garnishment, rest assured that you are not alone.
This guide is designed to explain what a wage garnishment is, how it works, and what you can do if you receive a notice of wage garnishment from the IRS.
What Is an IRS Wage Garnishment?
A wage garnishment is the process of withholding earnings from an individual to repay a debt. In the case of IRS wage garnishments, that debt is incurred in the form of back taxes. In other words, an IRS wage garnishment is the process by which the federal government collects money from taxpayers who have failed to pay owed taxes by requiring employers of those taxpayers to collect a portion of their employee’s wages and send it to the Internal Revenue Service to offset the taxpayer’s outstanding debt.
An IRS wage garnishment is the process by which the federal government collects money from taxpayers who have failed to pay owed taxes by requiring employers of those taxpayers to collect a portion of their employee’s wages and send it to the Internal Revenue Service to offset the taxpayer’s outstanding debt.
IRS wage garnishments differ from wage garnishments from other creditors in a couple of key ways. First, IRS wage garnishments are not subject to the same laws and regulations as other wage garnishments. The IRS does not, for example, have to obtain a court order to garnish your wages. Additionally, the IRS is not limited by the state and federal garnishment limitations as other creditors are, which means it can leave delinquent taxpayers with very little money to live on.
Unlike other types of wage garnishments, IRS wage garnishments do not require a court order in order to be legally enforceable.
When Does the IRS Initiate Wage Garnishments?
The IRS does not garnish your wages as a first effort to collect your tax debt. There are some basic hoops that the IRS must go through first before they initiate wage garnishment. Here is the standard process which may lead to wage garnishment:
- The IRS must assess your tax liability and demand payment for it.
- You either ignore the notice demanding payment or refuse to make arrangements to pay your back taxes.
- The IRS sends you a tax bill entitled “Final Notice of Intent to Levy and Notice of Your Right to a Hearing”.
- When you receive this notice and 30 days have passed without action on your part to make payment arrangements with the IRS, then the IRS can begin the levy process and compel your employer to collect a portion of your wages to pay down your IRS debt.
Related: Find out what is Tax relief & What are the options to pay off a Tax debt.
How to Respond to an IRS Wage Garnishment?
If you receive notice of an IRS wage garnishment, it is important to contact the IRS right away to discuss your options. Generally speaking, the IRS prefers not to initiate the wage garnishment process because it is costly to maintain and can create difficulties for the IRS, the taxpayer, and the taxpayer’s employer.
Therefore, it is a good idea to contact the IRS quickly when you receive a notice of delinquent taxes so that you can avoid wage garnishment if possible.
What Does My Employer Have to Do If My Wages Are to Be Garnished?
It is important to know that if your employer receives a notice of levy against you, your employer is required by law to comply with the IRS instructions pertaining to levies. Your employer cannot make exceptions to this legal requirement.
The IRS generally uses Form 668 – W(ICS) or 668-W(C)DO to levy an individual’s wages, salary (including fees, bonuses, commissions, and similar items) or other income. Once your employer receives one of these forms, he or she generally has one full pay period before he or she must begin sending a portion of your wages to the IRS.
This provision is made so that you will have time to make alternate payment arrangements, if possible. Additionally, during this time you can discuss a release of the levy with the IRS if you have made alternate payment arrangements.
Included with the IRS instructions your employer receives is Publication 1494, which explains to your employer how to determine the amount exempt from levy. Your employer will provide you with a Statement of Exemptions and Filing Status to complete and return within three days.
How Much Can the IRS Garnish From My Paycheck?
When the IRS garnishes your wages, a portion of your wages will be sent directly to the IRS from your employer until one of three things happens. Your wages will be garnished until:
- You make other payment arrangements to handle your tax debt.
- You pay your tax bill and all associated interest and penalties in full.
- The tax levy is released formally by the IRS.
The portion of your wages that will be exempted from the IRS garnishment is based on the standard deduction and the number of personal exemptions you are allowed to claim. Publication 1494 mentioned above contains a chart that will help you figure out what portion of your wages will be garnished.
While the IRS bases its guidelines on what it deems to be reasonable to ensure that you will have enough money left for regular living expenses, it is possible that the portion of your wages to be garnished might be as much as 70 or 80 percent of your pay, depending on a number of factors.
This is why it is essential to contact the IRS to make other payment arrangements if possible, so that you can mitigate the negative impact of garnishments on your budget. Alternatively, you can hire a Tax attorney to help with solving issues with the IRS.
It is also important to note that for wage garnishment purposes, the term salary or wages includes compensation for services paid in the form of fees, commissions, bonuses and similar items. This means that if you are scheduled to receive a bonus in addition to your regular salary, for instance, the IRS would receive the entire bonus since the exempt amount is based on the time-period that your wages and bonus are paid.
How Can I Stop an IRS Wage Garnishment?
While it may seem hard to believe, the IRS does not want to have to deal with garnishing your wages any more than you do. So, there are several ways you can stop a wage garnishment even after it has been initiated. Here are some methods of stopping a wage garnishment:
- Pay your tax debt in full.
- Enter into an installment agreement with the IRS to pay all taxes due.
- File for an offer in compromise.
- File for bankruptcy. (This does not release you from having to pay your tax debt in full, but it can stop the IRS from garnishing your wages for collection purposes.)
- Quit your job. (This is not an optimal solution. While it is true that the IRS cannot garnish wages if you have no wages, the IRS can still seize personal and real property to collect the debt, and you will be out of a job.)
What If the Wage Garnishment is Creating Hardship for Me?
First off, it is good to understand how the IRS defines a “hardship”. While you may think that garnishing a large percentage of your paycheck every pay period creates a hardship, the IRS may not agree. This is what the IRS says about a hardship: “An economic hardship occurs when we have determined the levy prevents you from meeting basic, reasonable living expenses. In order for the IRS to determine if a levy is causing hardship, the IRS will usually need you to provide financial information so be prepared to provide it when you call.”
If the IRS determines that the wage garnishment is, indeed, creating an economic hardship for you, they may release the levy. However, this does not mean that your tax debt is forgiven. You will still be liable for paying your tax debt even when the levy is released and your employer is no longer required to garnish your wages.
How Can I Avoid an IRS Wage Garnishment?
The best way to avoid a tax levy or IRS wage garnishment is to file and pay your taxes when due. If that is simply not possible, you can:
The most important thing to remember is that you need to respond to any and all notices you receive from the IRS as promptly as possible. Even if you cannot pay your tax debt, it is still imperative to contact the IRS to discuss all your options.
Where Can I Get Help to Handle an IRS Wage Garnishment?
If you are uncomfortable dealing directly with the IRS to try to resolve tax problems, you may find it helpful to hire a tax attorney or CPA to help. These professionals are well versed in handling all tax related issues, and can be an invaluable aid to you because they know the ins and outs of tax law, and are well aware of tools that can be used to improve your tax situation.
A tax professional can offer much in the way of help with wage garnishment issues.
If your wages are already being garnished, a tax attorney may be able to put a hold status on your garnishment while he or she works to negotiate a settlement with the IRS. This means that you would still have access to your funds as long as the settlement is being negotiated.
By analyzing your financial, tax, and employment situation, a tax attorney can help you determine the best type of settlement for your particular situation. Then, after reaching a settlement, you can once again enjoy a good standing with the IRS.