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The Internal Revenue Service will issue an IRS levy against taxpayers who have not paid or secured an IRS tax relief settlement. Most IRS levies are issued by the Automated Collection System (ACS).
The ACS is the IRS computer that matches taxpayers, their tax debt, and a source to collect (employer, bank, etc.).
The IRS can issue an order to levy (garnish) to a taxpayer’s income sources (wages, commissions, etc.) and third parties who hold assets on behalf of the taxpayer (banks).
The most common levies are wage garnishments and bank levies. Another common levy is to levy the accounts receivable for a self-employed person or an independent contractor. Taxpayers often get into a dispute with the IRS on whether a tax levy against an independent contractor/self-employed person is a continuous levy or a one-time levy.
IRS Levy (Wage garnishment): Form 668-W
Wage levies or wage garnishments are IRS seizures of part of a taxpayer’s wages. A wage levy is continuous: meaning the tax levy will stay in place until the balance due has been paid in full, the taxpayer obtains a levy release due to IRS hardship (Currently not Collectible), the statute of limitations on collections expires, the taxpayer enters into an agreement with the IRS on the balance owed or the taxpayer submits an Offer in Compromise (IRS settlement).
The IRS orders a seizure of wages by issuing Form 668-W to levy an individual’s wages, salary (including fees, bonuses, commissions, and similar items), and other income. An IRS Form 668-A is also used to levy pension and retirement income. Many employers and tax professionals refer to Form 668-W as the “W-2 levy or garnishment” because it normally attaches to continuous payments like wages.
Self-employed and the Continuous Tax Levy
There can be confusion when self-employed people receive Form 668-W (levy on wages, salaries, and other income) as opposed to Form 668-A (levy of third parties). When Form 668-W is issued to an employer, the tax levy on their employee is continuous until the tax is paid, or the IRS levy is released. However, many times a continuous levy is issued against self-employed people or independent contractors instead of the more appropriate Form 668-A that would appropriately levy their accounts receivable only once.
Form 668-W states that it is a continuous tax levy on wages, salary, or other income. Taxpayers are constantly in a dispute with the IRS on what constitutes “other income.” Does this include payments made to an independent contractor? What about a self-employed person like a construction subcontractor who may receive payments for both services and materials?
Treasury Regulation 301.6331-1(b)(1) vaguely addresses this issue and is quoted directly below:
Continuing effect of levy on salary and wages. A levy on salary or wages has a continuous effect from the time the levy originally is made until the levy is released under section 6343. For this purpose, the term salary or wages includes compensation for services paid in the form of fees, commissions, bonuses, and similar items. The levy attaches to both salary or wages earned but not yet paid at the time of the levy, advances on salary or wages made after the date of the levy, and salary or wages earned and becoming payable after the date of the levy until the levy is released according to section 6343. In general, salaries or wages that are the subject of a continuing levy and are not exempt from levy under section 6334(a)(8) or (9), are to be paid to the district director, the service center director, or the compliance center director (director) on the same date the payor would otherwise pay over the money to the taxpayer. For example, if an individual normally is paid on the Wednesday following the close of each workweek, a levy made upon his or her employer on any Monday would apply to both wages due for the prior work week and wages for succeeding workweeks as such wages become payable. In such a case, the levy would be satisfied if, on the first Wednesday after the levy and on each Wednesday thereafter until the employer receives a notice of release from levy described in section 6343, the employer pays over to the director wages that would otherwise be paid to the employee on such Wednesday (less any exempt amount under section 6334).
The Regulation clearly seems to equate a continuous levy with payments made that are salaries and an employer-employee relationship. Also, the first part of this Regulation at 301.6331-(a)(1) addresses the scope of a tax levy to “property possessed and obligations which exist at the time of the levy.” The Regulation explains that “obligations exist when the liability of obligor is fixed and determinable although the right to receive payment thereof may be deferred to a later date.” Employees have fixed and determinable payments- in the form of wages that are routinely paid. However, payments to contractors are usually not fixed or determinable until the work is done.
The nature of the payments is important in determining whether the tax levy on an independent contractor is continuous or not. If the contractor has a contract for services that have not yet been performed, the levy is on future payments that are not obligations that exist at the time of the levy. The IRS levy is a one-time levy and not continuous because the taxpayer does not have the right to receive payments.
IRS Levy on your Bank and accounts receivable: Form 668-A
A Bank Levy and accounts receivable levies ordered by the IRS are seizures of assets in financial accounts or from amounts owed to the self-employed taxpayer by third parties. Bank and accounts receivable levies will be a one-time IRS Levy. This means that that the IRS sends the third party e.g., a financial institution or the customer of the self-employed person a levy notice. The IRS uses Form 668-A to levy property from a third party. The levy notice tells the third party to pay the amount owed to the taxpayer to the government. The third party is instructed to freeze the amounts owed to the taxpayer (i.e., in their financial account or invoices owed to a self-employed person or business). If the taxpayer is not successful in releasing the tax levy, financial institutions must send the frozen amounts 21 days after receipt of Form 668-A. Other third parties like customers must send in their payments to the IRS on the day they would normally pay their invoice. Form 668-A is often referred to as the “1099 levy” as many taxpayers levied in this manner are Form 1099-MISC or 1099-NEC recipients, like independent contractors or self-employed persons.
Businesses and Banks Are Often Confused by the 668-A Levy.
Businesses (and to lesser extent banks) who receive the form 668-A often freak out. "Is this permanent?" they ask. With the IRS potentially scrutinizing them, they don't want to screw it up. IRS problem solvers frequently have to clarify the rules of 668-A's with these businesses who are supposed to enforce them (or their legal department).
IMPORTANT IRS NEWS
In the current Federal budget that is about to be passed, there are several provisions you need to be cognizant of. The first is that the IRS will be adding 83,000 additional IRS Agents to its staff. These people won't be going after "the super-rich" only.
The second provision is that the IRS will monitor every transaction of $600 or more. This means that the IRS will have your banking information. Do you realize how easy it will be to enforce collection with that knowledge? No matter how small the tax debt may be, an easy computer match will have IRS levies flying out "fast and furiously."
THE TAX PROFESSIONALS HAVE A HISTORY OF GETTING THE IRS TO RELEASE AN IRS LEVY IN ONE DAY. THERE IS NEVER A NEED TO LOSE YOUR PAYCHECK OR QUIT YOUR JOB.