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How Does an Employer Comply with an IRS Wage Levy? | Wagner Tax Law
Collection Issues How Does an Employer Comply with an IRS Wage Levy?
When an individual has outstanding federal tax liabilities, the Internal Revenue Service (IRS) has a number of tools at its disposal to try to collect the liabilities from the individual, including levying the individual’s wages (I.R.C. § 6331(a)).
When the IRS issues a wage levy notice to an employer, the employer must pay the IRS all compensation due to the employee, less an exempt amount that the employer is allowed to pay to the employee for the employee’s ordinary and necessary living expenses. The employer must continue to pay the IRS the employee’s non-exempt compensation until the IRS issues the employer a notice of levy release. Compensation includes wages, salary, fees, commissions, bonuses, severance pay, and back pay. Employers who fail to honor an IRS wage levy may be held personally liable for the amounts that should have been paid to the IRS under the levy.
This article details general information regarding employer compliance with IRS employee wage levies, as well as changes to the amount exempt from IRS employee wage levies under the recently implemented Tax Cuts and Jobs Act (TCJA).
1. Levy Forms Used by the IRS. The IRS generally uses Form 668-W(ICS) or Form 668-W(c)(DO), Notice of Levy on Wages, Salary, and Other Income, to levy an individual’s wages, salary, fees, bonuses, commissions, benefits, retirement income, and other income.
Regardless of the IRS form used, a levy attaches to property or rights to property the employer holds that belong to the individual levied against. In general, the IRS uses the levy form that contains the most appropriate instructions about how to comply with the levy. Be sure to read the instructions on the levy form carefully.
2. I received a wage levy. What happens next?
An employer generally is allowed one pay period to get in compliance with the wage levy. This means that the employer must quickly determine how much of the employee’s compensation it must send to the IRS. The employer makes this determination as follows:
a. Instructions. The wage levy notice should be accompanied by instructions for the employer and employee regarding how to comply with the wage levy. See Notice 1439, Figuring the Amount Exempt from Levy on Wages, Salary, and Other Income, Forms 668-W, 668-W(ACS) and 668-W(ICS).
b. Form 668-W Parts 2, 3, and 5. The employer must immediately provide the employee with Parts 2, 3, and 5 of Form 668-W, Notice of Levy on Wages, Salary, and Other Income. Parts 2, 3, and 5 request information including the employee’s number of dependents, filing status, and eligibility for additional standard deductions. This information is used by the employer to determine the amount of the employee’s compensation not subject to the levy. To claim exemptions, the employee must complete and sign the Statement of Dependents and Filing Status on Parts 3, 4, and 5, and return Parts 3 and 4 to the employer within three work days after the employer receives the levy. (Note: The Statement of Exemptions and Filing status is being renamed, Statement of Dependents and Filing Status. See Notice 1439 (May 2018).)
c. Exemption Calculation. The wage levy notice should be accompanied by a table for the employer to use to calculate the amount of the employee’s compensation not subject to the wage levy. See Publication 1494, Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income (Forms 668-W(ACS), 668-W(c)(DO) and 668-W(ICS)). There are generally three steps to determine the amount of compensation exempt from the levy:
i. Exemption Calculation Table. Use the completed Form 668-W Parts 3 and 4 from the employee and Item 1 of the Publication 1494 exemption table to determine how much compensation is exempt from levy. Find the correct block on the table using the employee’s filing status, number of dependents claimed, and pay period. Items to note:
Employees cannot claim themselves as a dependent.
If no social security number is provided for a dependent, do not allow that dependent, unless “Less than six months old” is written in the space for that person’s social security number.
If the employee does not provide the completed Form 668-W Parts 3 and 4, then the exempt amount is what would be exempt if the employee had returned Parts 3 and 4 indicating married filing separate with no dependents (zero).
Do not use the information on the taxpayer’s Form W-4, Employee’s Withholding Allowance Certificate, to determine the amount that is exempt from this levy. That information can be different from what is filed on the employee’s individual income tax return.
ii. Additional Exemption Based on Age/Disability. If the employee and/or their spouse is at least 65 years old and/or blind, an additional amount is exempt from levy. The employee counts one for each of the following:
The taxpayer is 65 or older,
The taxpayer is blind,
The taxpayer’s spouse is 65 or older, and
The taxpayer’s spouse is blind.
This total (up to 4) is entered next to “Additional Standard Deduction” on the Statement of Dependents and Filing Status. If the employee enters a number in this space, use Item 2 of the exemption calculation table to figure the additional amount exempt from levy.
iii. Additional Exemption for Court-Ordered Child Support. The amount of support, established by a court or an administrative order, which the employee must pay for minor children is also exempt from the levy, but only if the court or administrative order was made before the date of the levy. These children can’t be claimed as dependents on Form 668-W Parts 3, 4, and 5.
3. Wage levies are continuous. Unlike bank and other levies that only attach to property in possession of the levied party on the date the party receives the levy, a wage levy is a continuous levy. I.R.C. § 6331(e). It attaches to future payments until the levy is released. The employer must continue to pay over all funds subject to the IRS wage levy until the IRS releases its levy.
4. Amount owed. Wage levy forms include a “Total Amount Due.” This amount is calculated through the date shown below the total amount due. Interest and any applicable penalties will continue to accrue after the date shown. To get an updated payoff figure, the person who owes the tax liability will need to contact the IRS. This information cannot be released to the employer.
5. Release of Levy. A wage levy may last for an extended period of time. When all of the tax shown underlying the levy is paid in full or the taxpayer makes arrangements with the IRS for the release of the levy, the IRS will issue a Form 668-D, Release of Levy/Release of Property from Levy.
Practice Tip. Employees who have a levy placed on their wages should contact the IRS as soon as possible to discuss a release of levy and resolution of their tax liability. Employees subject to levy action may benefit from guidance from a tax professional, such as an accountant or attorney, to determine their options for resolving their tax issues with the IRS. For example, even if an employee is unable to immediately pay their outstanding federal tax liabilities in full, depending on the employee’s financial circumstances, the employee may be able to increase the amount of compensation exempt from levy or stop IRS levy action by arranging for an Installment Agreement (monthly payment plan) or an Offer in Compromise (agreement to settle debts for less than the full liability owing) to resolve their outstanding federal tax liabilities.
6. Wages Paid to Employee. The employer pays the employee any amounts exempt from levy.
7. Wage Levy Calculation Before and After TCJA. Prior to TCJA, the weekly exempt amount was the sum of the employee’s standard deduction and the aggregate amount of the deductions for personal exemptions allowed for the employee under I.R.C. § 151 in the taxable year in which the levy occurred, divided by 52.
The TCJA eliminated the personal exemption claimed by taxpayers for themselves and their spouse and dependents for the periods January 1, 2018 through December 31, 2025, and nearly doubled the standard deduction in 2018 to $24,000 for married individuals filing jointly, $18,000 for head-of-household filers, and $12,000 for all others. These amounts will be adjusted for inflation beginning in 2019.
Under the TCJA, the calculation of the weekly exempt amount has been adjusted to account for the increased standard deduction. The weekly exempt amount is now the total of $4,150 (as adjusted for inflation after 2018) multiplied by the number of the taxpayer’s dependents for the taxable year, plus the standard deduction, divided by 52. The IRS has issued revised Notice 1439 and Publication 1494 to refigure the exemption calculation to take into account the increase in the standard deduction and modified exemption calculation.
8. Penalties for Employer Non-Compliance with Employee Wage Levy. To encourage third party compliance with such levies, Congress enacted I.R.C. § 6332. That section provides, in pertinent part, that “any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights … to the Secretary ….” If the person “fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary,” the person will become personally liable for the taxes, penalties and interest on the levy, plus collection costs. In addition, the IRS may also assess a penalty equal to 50% of the tax due.
9. Employer Should Not Fire Employee to Avoid Handling a Wage Levy. If an employer fires or threatens to fire an employee to avoid handling a wage levy, the employer may be in violation of 15 U.S.C. 1674. An employer that fires an employee to avoid handling a wage levy may be fined not more than $1,000 or imprisoned for not more than one year, or both. See Internal Revenue Manual 5.11.5.2.