Garnishments and levies reloaded: IRS turns up the heat

After a period of relative quiet, the IRS has ramped up its collection efforts, and tax professionals are once again seeing a surge in enforcement actions. Understanding the current landscape of IRS collections is essential for practitioners to advise and protect clients effectively. This includes the revived Automated Collection System (ACS), the sequence of collection notices and the mechanics of wage garnishments and bank levies.

After a slowdown during the pandemic, the IRS has shifted back into high gear. If your clients owe back taxes, the risk of enforced collection is higher than it’s been in years. Now is the time to review cases and take action before the IRS does.

Understanding the IRS collection notice timeline

ACS operates on a predictable notice sequence, but it has enforcement behind it. Here’s the path most delinquent taxpayers can expect:

• LT38: Special Reminder Letter

  This letter indicates that IRS collection notices are back in motion. It serves as a warning that follow-up notices and possible enforcement are coming.

• CP501, CP503, CP504: Reminder Notices

  These are issued roughly every eight weeks. They inform the taxpayer of their debt and request payment, but if ignored, enforcement follows.

• LT11: Final Notice of Intent to Levy

  This is the most critical notice. The IRS LT11 notice signals that the agency intends to seize assets, garnish wages or levy bank accounts. Taxpayers have 30 days to respond.

IRS wage garnishments and bank levies are happening now

A wage garnishment is one of the IRS’s most powerful collection tools. After issuing the LT11 and waiting the required 30 days, the IRS can contact an employer and require them to withhold a portion of the taxpayer’s wages to satisfy the tax debt. The amount exempt from garnishment is based on filing status, pay frequency and number of dependents, but the remainder is sent directly to the IRS.

A bank levy allows the IRS to seize funds directly from a taxpayer’s bank account. Unlike ongoing wage garnishments, a bank levy is a one-time event, though the IRS can issue multiple levies if the debt remains unpaid. The bank must hold the funds for 21 days before remitting them to the IRS, giving the taxpayer a brief window to resolve the issue.

Example

Angelica owes $22,000 from tax years 2018 and 2019. After ignoring the LT38 and CP504 notices, she receives IRS LT11. Without a response, the IRS can notify her employer to garnish up to 25% of her paycheck. If she is self-employed, the IRS may issue a bank levy, draining funds directly from her business account. As her tax professional, you can help Angelica by negotiating with the IRS about a payment plan or submitting an offer in compromise, but time is of the essence once garnishment begins.

The good news? Wage garnishments and bank levies can be stopped, but only with immediate action and the right resolution strategy.

Don’t overlook IRS CP508C

In addition to financial enforcement, the IRS may revoke or deny passports for those with seriously delinquent tax debt (over $62,000). The CP508C notice informs taxpayers that their case has been referred to the State Department.

This has major implications for international travelers, contractors and clients in global roles. It’s an enforcement tool that’s gaining more attention and power.

Best practices for tax professionals

• Monitor IRS notices closely:
  Encourage clients to forward all IRS correspondence immediately. Early intervention is key to avoiding enforcement actions.

• Educate clients on the consequences of inaction: Many taxpayers underestimate the seriousness of IRS notices. Make sure clients understand that ignoring the IRS can lead to wage garnishments, bank levies, liens and even passport restrictions.

• Act quickly after LT11:
  The 30-day window after LT11 is critical. File a Collection Due Process (CDP) hearing request if there are grounds to dispute the debt or negotiate a resolution.

• Explore all resolutions options: Depending on the client’s circumstances, consider installment agreements, offers in compromise, or currently not collectible status. Each option has its own requirements and implications.

• Stay informed about special populations:
  Federal employees and contractors face additional risks. The IRS has warned that unresolved tax debts could jeopardize their employment. If you have clients in this category, prioritize their cases and communicate the heightened stakes.

A warm, proactive approach

As tax professionals, our role extends beyond technical expertise. Clients facing IRS collections are often anxious and overwhelmed. Approach these situations with empathy, clear communication and a solutions-oriented mindset. By staying ahead of the IRS’s renewed enforcement efforts, you can help clients avoid the most severe consequences and regain control of their financial lives.

IRS collections are here, so be ready

The IRS’s collection machinery is back in motion, and wage garnishments and bank levies are once again a real threat for delinquent taxpayers. For tax professionals, vigilance, timely action, and client education are more important than ever. By understanding the notice sequence, the mechanics of enforcement, and the available resolution strategies, you can provide invaluable support to clients navigating these challenging waters.

If your clients receive notices LT38, CP501, CP504 or LT11, it’s time to act. Once a levy is in place, recovery becomes more difficult and more urgent.