How to Stop IRS Wage Garnishment

Wage garnishment is often the most feared part of the IRS collection process. It can result in receiving a much smaller paycheck for years. However, the IRS doesn't simply jump to garnishing your wages when you don't pay your income tax bill. It is one of the final steps of the tax collection process and the IRS is often willing to work with taxpayers to come up with alternatives to garnishment. In the sections that follow, we will explain what it means for the IRS to garnish your wages and the options you have for stopping the agency from doing so.

What Is Wage Garnishment?

Simply put, wage garnishment is the legal procedure through which a portion of a person's earnings are withheld by an employer for the purposes of paying a debt, such as unpaid taxes, child support, creditors, and debt collectors. What sets the IRS apart from most other creditors is that it does not need a court order and often garnishes as much as 70% of your monthly income. However, the IRS by law must take multiple steps before it can garnish your wages and must give you the opportunity to challenge its actions.

How Much of My Wages Can the IRS Garnish?

Under federal law, most creditors are limited to garnishing up to 25% of your disposable wages. However, the IRS is not like most creditors and often garnishes up to 70% of your disposable income each pay period. Fortunately, a portion of your wages are exempt from levy and must be paid to you, regardless of how much you owe the IRS.

The exempted amount is calculated using the federal standard deduction and based on your filing status and the number of dependents you can claim for the year the levy is served. The IRS will send your employer information explaining to your employer how to calculate the amount exempt from levy.

According to the table provided by the IRS for 2023, a single taxpayer with no dependents can only exempt $1,154.17 a month ($53.27 per day) from garnishment. Any income the individual receives above that amount will be paid to the IRS. A married taxpayer filing a joint return with two dependents can claim an exemption of up to $2,308.33 a month ($106.54 a day).

IRS Collection Process

IRS wage garnishment, technically a wage levy, is part of the final step of the agency's process for collecting back taxes. The process gives taxpayers a number of opportunities to either appeal their tax bill or come to an alternative arrangement with the IRS. U.S. tax law governs the IRS collection process and the agency must follow the legal procedures laid out in the Internal Revenue Code by Congress. The collection process starts when the IRS sends you a bill for your unpaid taxes. The process is completed when you have either paid what you owe or the time period the IRS has to collect has expired.

The first notice the IRS issues is a letter explaining that you have an unpaid balance and demanding that you pay your full tax bill. The notice will include the tax owed, any penalties assessed, and interest accrued on the balance shown on your account. You should pay your tax liability as early as possible. The interest compounds daily and the IRS can impose a monthly late payment penalty.

Payment Plans

If you are unable to pay your full tax bill, you may be eligible for a payment plan that will allow you to resolve your tax problems. The IRS offers several options for their plans based on how much you owe and how quickly you can pay. If you owe $100,000 or less, you may be eligible for a short-term payment plan that gives you as long as 180 days to pay.

Taxpayers who can't pay their tax bill in 180 days may be eligible for an installment agreement that will allow them to make monthly payments. An installment agreement can be applied for by using the IRS's Online Payment Agreement Application, by completing Form 9465, Installment Agreement Request, or by phone at the number on your past-due notice. The IRS charges a fee for setting up an installment agreement.

Offer in Compromise

For those who can't make payments on an installment agreement, in certain circumstances the IRS will allow you to settle your tax debt for less than you owe using an offer in compromise (OIC). An OIC resolves your tax liability through an agreement with the IRS to pay a reduced amount. However, before the IRS will consider an offer in compromise, you must do the following:

• File all required tax returns
• Propose payment for one or more outstanding tax bills
• Make your estimated tax payments for the present year
• Have made the required tax deposits for the last three quarters (if you own a business with employees)

Additionally, you will not qualify for an if you are currently in bankruptcy. The IRS offers a tool to help you assess whether you qualify for an offer in compromise.

Currently Not Collectible

Taxpayers unable to pay due to financial hardship can ask the IRS to change their account status to currently not collectible (CNC). If the IRS assesses your financial situation and finds you truly can't pay after you have provided proof of your situation, it may delay collections by classifying your account as CNC until you are in a better financial situation. This does not get rid of your tax debt—it simply means you can't pay right now. While the IRS won't require you to pay while your account is not collectible, interest and penalties will continue to accrue.

Notice of Federal Tax Lien

The IRS will file a Notice of Federal Tax Lien in your local recording office so that your other creditors will know that you owe money to the agency. A lien is created automatically when the IRS issues the first notice demanding that you pay an assessed tax, and you don't pay the full amount due. The notice may impact your credit, but it is no longer reported by the major credit reporting agencies.

Once the IRS has issued notice of a federal tax lien, it won't be released until you have paid the tax due, any penalties, interest, and any recording fees in full. The IRS may also release a tax lien after the statute of limitations for collecting has expired and it is no longer allowed to collect.

IRS Levy

Wage garnishment may occur after the IRS has determined that a tax levy is the next appropriate action to collect your unpaid taxes. A levy will allow the IRS to seize assets like the wages from your employer, all of your bank accounts, your Social Security benefits, and your retirement income. The IRS may also seize property you own — such as real estate, cars, and boats — that can be sold to pay your tax debt. The levy will also allow the IRS to seize future federal or state tax refunds and apply those amounts to your unpaid tax liability.

Written Notice of Garnishment

The IRS must send you written notice of a levy before it can garnish your wages. The notice will list the amount owed, including penalties and interest, and include a due date for repayment of the balance. If you don't pay the balance by the deadline, it will send you a Final Notice of Intent to Levy by registered or certified mail 30 days before it begins garnishment. The final notice will include a notice of your right to a hearing to challenge the collection action. The actual notice of garnishment goes directly to your employer, who will notify you that your wages are being garnished.

Stopping Wage Garnishments

In most cases, getting the IRS to stop garnishing your wages requires the IRS to release the underlying levy. Remember, the garnishment is an action the IRS has taken as part of the levy, allowing it to seize your assets, including your wages. The IRS must release its levy in the following situations:

• You pay the tax owed
• The period for collecting your tax debt ended before issuing the levy
• You prove that releasing the levy will help you pay your taxes
• You enter into an installment agreement whose terms don't allow for the levy to continue
• The levy created an economic hardship where the IRS finds it prevents you from paying basic, reasonable living expenses

Even if you successfully stop garnishment by getting the levy resolved, you may still need to pay the balance due. If you don't make arrangements for resolving your tax debt, the IRS may reissue the levy.

The Bankruptcy Option

Once wage garnishment has begun, filing for bankruptcy can offer temporary relief. When you file, the bankruptcy court will issue an automatic stay that will stop all collection actions against you. However, this is usually a short-term solution because most tax debts are not wiped out by bankruptcy.

Options for Appealing IRS Collection

If you disagree with an IRS collection decision, you have the option of filing an appeal with the IRS Office of Appeals. There are generally two options for appealing a collection action:

Collection due process. The collection due process (CDP) generally takes longer than the second option, but if you disagree with the outcome you have the option of appealing the decision to a court.

Collection Appeals Program. The Collection Appeals Program (CAP) is usually faster than CDP, but if you disagree with the results, you can't appeal to a court.

Taxpayers can represent themselves in the appeals process, or they can be represented by a tax attorney, CPA, or an enrolled agent. An enrolled agent is a tax professional authorized to practice before the IRS and represent clients with their tax issues.

Is the IRS Garnishing Your Wages? An Attorney Can Help

It's frightening when you receive a Notice of Intent to Levy, and you are facing a substantial reduction in your take-home pay. Many people ignore IRS notices, hoping that the problem will just go away. Taking action when you receive the notice may allow you to get the levy released so you can move on. Contact an experienced local tax law attorney for help.