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Wage Garnishment & IRS Tax Debt

Like taxes, debt also appears to be something which is nearly universal in life. This applies doubly to Americans living in the early part of the 21st century. Modern day Americans are more indebted than ever, particularly younger Americans of the millennial generation. Millennials, for instance, have record-breaking levels of educational debt.  Very often, they also have sizable credit card debt.  That, in turn, often will take years and plenty of effort to resolve.

For those Americans who are in debt, there are several different ways to settle this debt.  They include bankruptcy, debt consolidation, debt settlement and others. One method for settling tax debt is called wage garnishment. We’re going to focus on this method of debt settlement in this blog post.  We’ll also cover the basics of wage garnishment, discuss what debtors can expect when they receive a garnishment order.  We’ll then highlight different strategies debtors can employ to avoid receiving such an order.

As we’ll see, wage garnishment or, as it’s also known, a wage levy, is much more of a solution for debt collectors rather than debt holders, and is typically viewed as a “last resort” for collectors who’ve exhausted all other conceivable possibilities for repayment. Significantly, it’s possible for a taxpayer to receive a wage garnishment for back taxes owed to the Internal Revenue Service.

Basics of Wage Garnishment

As its name implies, wage garnishment literally involves the active taking of a debtor’s income.  It’s comes directly from an employer’s payroll.  It’s done in order to satisfy an outstanding debt of one of its employees. If an individual owes money to a creditor, including the IRS, that creditor has the power to ultimately garnish wages.  It’s a long-standing way to settle balances due. How a creditor gets a garnishment order depends partly on a contract’s terms.  Depending on terms between the debtor and creditor, any creditor may attempt to resolve the debt through garnishment. When creditors, other than the IRS, obtain a garnishment order the process is typically quite involved.  Accordingly, such creditors rarely pursue this collection route if there’s another alternative.

In obtain to obtain a garnishment order, a creditor typically must take the debtor to court.  If successful in court, the creditor obtains a judgment.  The judgment is against the debtor for the outstanding balance due, plus interest. Once the creditor receives the judgment, the order often goes on record at the county clerk’s office. A copy is then sent to the debtor’s employer with an order to withhold a portion of the employee’s paycheck.  This, of course, assumes that the debtor is a W-2 employee.  The employer will then start to remit a portion of the debtor’s wages directly to the creditor. Of course, the creditor is only able to take a percentage of the debtor’s wages.  The remainder of the debtor’s wages are off limits as non-disposable funds needed for living expenses.

Wage Garnishment for IRS Tax Debt

Not only can the IRS pursue a wage garnishment order against a taxpayer for unpaid taxes, but the process is actually far simpler when the creditor trying to obtain the order is the IRS. Unlike every other type of creditor, the IRS does not need to secure a judgment in order to garnish wages; instead, the IRS is able to put an order in place without judicial involvement and can independently begin collecting a portion of your wages to satisfy back taxes. Note, however, that the IRS will not pursue wage garnishment without first attempting to resolve the outstanding tax debt through some other means. In other words, you should never receive a garnishment order as a surprise from the IRS, as it will be made clear to you that garnishment is a last resort for the IRS and will only be pursued when other options have failed.

IRS Garnishment Limits

Importantly, the IRS is also limited in the amount it may collect from your wages in ways that are different from other creditors. Generally, there are limits on a a creditor, other than the IRS, regarding the percentage of the debtor’s gross wages that it can take and apply toward the outstanding judgment debt. State law affects this percentage. So, for instance, if a state limits a creditor to 15% of a debtor’s gross wages, that means that the creditor will only be able to take $450 from an employee who earns $3,000, on a monthly basis. The limits on the IRS, by contrast, pertain to what it must leave the debtor.  Based on the debtor’s financial situation, the IRS will have to leave the debtor with a certain amount of money.  Beyond that amount, the IRS can take the remainder of a debtor’s wages. This has the effect of enabling the IRS to extract larger amounts, on a percentage basis, from debtors who earn more. IRS Publication 1494 sets forth the specific tables to determine the amount exempt from an IRS levy on wages, salary, and other income of taxpayers.

An Extreme Solution

Again, an IRS garnishment order is just as extreme a solution as if enforced by others. The IRS will only initiate garnishment when it has already tried other means to settle the debt. Hence, the best way to avoid a garnishment order is to simply be proactive in resolving the debt with the IRS using some other means. For instance, taxpayers can make an offer in compromise, structure an installment payment agreement (IPA), pay the balance in full, quit the job, declare bankruptcy, or apply for currently not collectible status. Whatever route a taxpayer chooses, they shouldn’t ignore the tax debt and repeated IRS notices.  Doing so may actually cause the IRS to place the garnishment order.

Our NYC Tax Attorneys Can Help You

The attorneys at Mackay, Caswell & Callahan, P.C. focus on a wide variety of tax and business matters.  Tax debt relief and tax resolution are among our principal areas of concentration. We will continue to examine debt reduction and elimination topics as we move forward with our blog posts. We want to make sure that this blog not only educates but also points our readers toward the key areas of our practice. If you have a tax resolution issue and need tax relief or have other related issues, feel free to contact this NYC tax attorney and we will give your concerns the attention they deserve.

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