When you owe thousands of dollars or more in back taxes, the IRS can levy (seize) your assets to offset your tax debt. Taking assets is a last resort for the IRS after they send a series of balance due notices and make numerous attempts to collect your unpaid taxes.
In most cases, the IRS sends a 30-day notice before starting a levy. This gives a taxpayer enough time to make payment arrangements or request a collection due process hearing to resolve the tax debt issue.
However, if the IRS considers a taxpayer a flight risk, they may levy assets without notice.
We will review the types of assets the IRS can levy and how they determine what to seize first, from liquid assets to investments and Social Security benefits.
Starting with liquid assets, like your wages and bank account, the IRS will always give highest priority to take what is easy to turn into cash to pay your tax debt.
Liquid Assets
Liquid assets are cash assets or items that the IRS can convert to cash. They are the easiest to seize and the top priority when the IRS issues a levy.
Examples of liquid assets include:
- Checking, savings, and money market accounts
- Wages (the IRS can garnish wages and take money from your paycheck)
- Accounts receivables (self-employed client payments)
- Retirement accounts (IRAs and 401(k) plans are protected from creditors but not from an IRS levy)
- Cash on hand
Investment Assets
Second on the list of IRS priorities for a levy are investments.
Examples of investment assets include:
- Stocks
- Government and corporate bonds
- Mutual funds
- Annuities
- Certificates of Deposit (CDs)
- Exchange-traded funds (ETFs)
- Interests held as investment assets in limited partnerships
- Real estate investment trusts (REITs)
- Collectibles and antiques held in investment accounts
Business Assets
For those who own a business, business assets are the third priority for an IRS levy.
Examples of business assets include:
- Inventory (raw materials and finished goods)
- Equipment, machinery, and vehicles used to generate income
- Real estate (buildings and land owned by the business)
- Trademarks, patents, and other intangible assets
In egregious tax debt cases, the IRS can also legally revoke a business’s permits or licenses to collect unpaid taxes. Occasionally, the IRS seizes a business license if the company has been involved in tax evasion or other severe tax law violations.
Non-Essential Personal Property
Fourth on the list of IRS levy priorities is non-essential personal property.
Examples of non-essential personal property assets include:
- Jewelry (watches, rings, necklaces, and other similar items of high worth)
- Valuable artwork and antiques
- Computers, big-screen TVs, audio/video devices, and other expensive electronics
- Boats, RVs, motorcycles, snowmobiles, jet skis, and other leisure items
- Non-residential properties, such as vacation homes and rental properties
In addition to these common items, the IRS may seize any other non-essential personal property they deem to have significant value that will help cover a tax debt.
Life Insurance Polices
Life insurance policies are fifth on the IRS list of levy priorities because they can have a cash value. Part of the premiums paid by a policyholder gradually increase this cash value over time.
If the policyholder terminates coverage after several years, the life insurance company will pay the policy’s cash value to the holder. The amount paid to the policyholder is called the “cash surrender value.”
The IRS can seize a person’s life insurance policy or policies if the policy’s cash surrender value is substantial.
For example, if you owe the IRS $25,000 in back taxes and have not attempted to resolve the debt, the IRS may levy your life insurance policy after learning it has a cash surrender value of $10,000.
Social Security Benefits
Although Social Security benefits have some protection, they are sixth on the IRS priority list for a levy. The IRS can levy a portion of, but not all, of an individual’s Social Security benefits if they owe back taxes.
However, certain limitations ensure the individual is not left without enough benefits to pay for essential living expenses, such as mortgage or rent, food, and utilities.
This Social Security “exemption amount” is based on an individual’s filing status and the number of dependents they claim.
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