What Can the IRS Do to Your Wages if You Owe a Tax Debt That You Haven’t Settled?

Table of Contents

Introduction

Owing taxes to the IRS is a situation that no one wants to face. The Internal Revenue Service (IRS) has significant authority when it comes to collecting unpaid taxes, and their methods for ensuring tax compliance can be quite serious. One of the most impactful actions the IRS can take is garnishing your wages if you owe a tax debt that you haven’t settled. Wage garnishment can disrupt your financial situation, reducing your disposable income and affecting your ability to meet other financial obligations.

This article will delve into the various actions the IRS can take against your wages, how the process works, what legal rights you have, and the steps you can take to prevent or stop wage garnishment.

Understanding Tax Debt and Its Consequences

1. What Constitutes a Tax Debt?

A tax debt arises when you fail to pay the full amount of taxes you owe to the IRS. This could occur due to several reasons, such as not paying enough during the year through withholding or estimated tax payments, filing a tax return but not paying the balance due, or receiving a notice of audit adjustments. Once the IRS determines that you owe money, it can begin taking action to collect the unpaid taxes.

2. Consequences of Unpaid Tax Debt

Unpaid tax debt has several consequences beyond just accumulating interest and penalties. The IRS can take multiple actions to ensure tax compliance, and if you continually neglect or ignore your tax debt, the consequences can escalate.

Some consequences of failing to pay your tax debt include:

Penalties and interest: These increase the total amount you owe over time.
Tax lien: The IRS can file a Notice of Federal Tax Lien, which asserts a legal claim against your property.
Tax levy: A levy allows the IRS to seize your property, wages, and other assets to settle the debt.
Wage garnishment: The IRS can instruct your employer to withhold a portion of your wages to satisfy the debt.

Among these actions, wage garnishment can have a particularly direct and immediate impact on your finances.

How IRS Wage Garnishment Works

1. What Is Wage Garnishment?

Wage garnishment is a legal process where a portion of your income is withheld by your employer and sent directly to a creditor—in this case, the IRS—to settle a debt. Unlike other creditors, the IRS does not need to obtain a court order to garnish your wages. If you owe a tax debt, the IRS can issue a wage levy, also known as wage garnishment, without involving the court system.

2. The IRS Collection Process: Step-by-Step

Before the IRS can garnish your wages, it follows a specific process. Here’s how it typically works:

Tax Bill or Notice of Deficiency: The IRS first sends you a bill or a notice of deficiency informing you that you owe taxes. If you do not respond to this notice or settle the debt, the IRS will move forward with collection actions.
Notice of Intent to Levy: If you don’t address the issue, the IRS will send a final notice called a Notice of Intent to Levy. This notice gives you 30 days to take action—either by paying the debt, setting up a payment plan, or appealing the tax assessment.
Levy Action: After the 30-day period, if no resolution has been reached, the IRS can issue a wage levy and start garnishing your wages.
IRS Form 668-W: The IRS sends your employer a Form 668-W, which is a notice of wage garnishment. The employer is then legally required to begin withholding a portion of your wages.
Amount Withheld: The IRS determines the amount of wages to be garnished based on your filing status and the number of dependents you claim. While other types of creditors are limited in how much they can garnish, the IRS is allowed to take a larger portion of your wages. In some cases, the IRS may leave you with only a small portion of your paycheck—enough to meet minimum living expenses.

3. How Much of Your Wages Can the IRS Garnish?

The amount of your wages that the IRS can garnish depends on several factors, including your filing status, the number of dependents you have, and the IRS’s own table of “exempt amounts.” The IRS uses this table to determine how much of your income you are allowed to keep after garnishment, with the rest going toward your unpaid taxes.

For example, if you are single with no dependents, the exempt amount may be quite low. The IRS could take a significant portion of your wages, leaving you with only enough to cover basic living expenses. On the other hand, if you are married with dependents, the exempt amount may be higher, meaning the IRS would garnish a smaller percentage of your wages.

IRS Wage Garnishment: Legal Rights and Limits

1. Your Rights Before and During Wage Garnishment

The IRS is required to follow a strict set of procedures before garnishing your wages. This means that you have several rights before the IRS can begin garnishment, including:

Right to Receive Notice: The IRS must notify you of your tax debt and give you an opportunity to settle the debt or respond to the notice.
Right to Appeal: You have the right to appeal the IRS’s decision to garnish your wages. You can do this by filing a request for a Collection Due Process (CDP) hearing within 30 days of receiving the Notice of Intent to Levy.
Right to a Payment Plan: If you cannot pay the full amount you owe, you have the right to request a payment plan or installment agreement with the IRS. This could stop wage garnishment as long as you adhere to the terms of the plan.
Right to an Offer in Compromise: In certain cases, you may be eligible for an Offer in Compromise, which allows you to settle your tax debt for less than the full amount owed if you can demonstrate that paying the full amount would cause undue financial hardship.

2. Limits on IRS Wage Garnishment

The IRS must leave you with a minimum amount of income to cover your basic living expenses. The exempt amount is determined by your filing status, the number of dependents you claim, and the IRS’s collection tables. This means that although the IRS has significant power when it comes to garnishing wages, it cannot take every dollar you earn.

The following factors impact how much of your wages are exempt from garnishment:

Filing status (single, married, head of household)
Number of dependents
Frequency of your pay (weekly, bi-weekly, monthly)

The IRS will apply these factors to determine how much of your income you are allowed to keep after garnishment.

Stopping or Preventing IRS Wage Garnishment

1. Paying Your Tax Debt in Full

The most straightforward way to stop wage garnishment is to pay your tax debt in full. Once you do so, the IRS will release the wage levy. However, if paying the entire amount is not feasible, you will need to explore other options.

2. Entering Into an Installment Agreement

If you cannot afford to pay the full amount in a lump sum, you can request an installment agreement with the IRS. This allows you to make monthly payments toward your tax debt. As long as you adhere to the terms of the payment plan, the IRS will stop wage garnishment. You can apply for an installment agreement online or by contacting the IRS.

3. Submitting an Offer in Compromise

An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount owed. The IRS will consider an OIC if it believes that it is unlikely you will be able to pay the full amount, either due to financial hardship or other circumstances. To submit an offer, you must provide detailed financial information, including your income, expenses, assets, and liabilities. If the IRS accepts your offer, it will stop wage garnishment and release any other levies.

4. Requesting a Hardship Determination

If wage garnishment is causing financial hardship, you can request that the IRS classify your account as “currently not collectible.” This status temporarily halts collection efforts, including wage garnishment, but interest and penalties will continue to accrue on the unpaid balance.

5. Filing for Bankruptcy

Filing for bankruptcy can also stop IRS wage garnishment, but this is a drastic measure and should be considered only after exploring other options. In certain types of bankruptcy (such as Chapter 7), you may be able to discharge tax debts, while in others (such as Chapter 13), you may enter into a repayment plan that includes your IRS debt.

Conclusion

Wage garnishment by the IRS can have a significant impact on your financial well-being, reducing the income you have available to meet your daily needs. The IRS has powerful tools at its disposal to collect unpaid taxes, but there are also legal protections and options available to you. By understanding the process and knowing your rights, you can take steps to prevent or stop wage garnishment.

If you owe a tax debt to the IRS that you haven’t settled, it’s important to act quickly. You can avoid wage garnishment by responding to IRS notices, setting up a payment plan, or seeking professional help to resolve your tax situation.