Losing a portion of your paycheck to the IRS can be a shocking and stressful experience. In recent years, the issue of wage garnishment has affected many Americans.
For example, a case involving Bank of America highlighted the seriousness of illegal garnishments, where the bank was ordered to pay a $10 million penalty for processing unlawful garnishment orders against its customers’ accounts.
Understanding how wage garnishment works and knowing your rights can help you manage this situation effectively. Here’s what every taxpayer in the USA should know about IRS wage garnishment and how to handle it.
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What is IRS Wage Garnishment?
Wage garnishment occurs when the IRS legally requires your employer to withhold a portion of your paycheck and send it directly to the IRS to pay off your tax debt. This can happen if you have unpaid taxes and have not responded to IRS notices demanding payment.
The IRS resorts to wage garnishment as a last step to collect unpaid taxes. Before garnishing wages, the IRS typically sends a series of notices, including a final notice of intent to garnish, which gives taxpayers an opportunity to resolve their tax issues.
Why does the IRS Garnish Wages?
If the IRS starts garnishing your wages, it means urgent action is needed. Here’s why this could be happening:
- You owe back taxes.
- You have not responded to multiple IRS notices.
- You have not entered into a payment arrangement with the IRS.
- The IRS has sent a final notice of intent to garnish at least 30 days prior to garnishment.
How Much Can the IRS Garnish?
The IRS uses a specific formula to determine how much of your wages can be garnished, based on your filing status and the number of dependents you have.
- Exempt Amount Calculation: The IRS calculates an exempt amount to ensure you have enough to cover basic living expenses. This exempt amount is based on your filing status and number of dependents.
- The Exempt Amount for Singles: Single filler with no dependents is $280.77 per week or $1,216.67 per month.
- The Exempt Amount for Married Couples: Married couples with two dependents is $753.84 per week or $3,266.67 per month.
- Garnishable Amount: The IRS can garnish the portion of your wages that exceeds the exempt amount. The exempt amount is based on the standard deduction and an amount determined by the number of dependents you are allowed for the year the levy is served.
- Multiple Jobs: If you have multiple jobs, the IRS considers your total income from all sources to determine the garnishable amount. The IRS may allocate the exemptions to other income sources and levy 100% of the income from a particular employer. Each employer will be notified of the portion of your wages to withhold and send to the IRS.
Understanding how much the IRS can garnish helps you anticipate and manage the impact on your finances. This straightforward approach ensures that you are informed and prepared.
Steps to Prevent or Stop Wage Garnishment
Taking prompt and effective action can help you manage and possibly stop the garnishment process. Let’s get to know them:
- Respond to IRS Notices: Ignoring IRS notices will not make them go away. It’s essential to respond promptly to any communication from the IRS.
- Set Up a Payment Plan: One of the most effective ways to stop wage garnishment is to set up an installment agreement with the IRS. This allows you to pay off your tax debt in manageable monthly payments.
- Offer in Compromise: If you can demonstrate that paying your full tax debt would cause significant financial hardship, you might qualify for an offer in compromise, which allows you to settle your tax debt for less than the full amount owed.
- File for Hardship Status: If garnishment would cause financial hardship, you can request that the IRS place your account in currently not collectible (CNC) status. While in CNC status, garnishment stops, but interest and penalties continue to accrue.
Consequences of Wage Garnishment
Understanding the potential impacts can help you prepare and take the necessary steps to prevent them.
- Financial Impact: Garnishment can significantly reduce your disposable income, making it harder to meet your daily expenses.
- Credit Score: While wage garnishment itself doesn’t affect your credit score, the unpaid tax debt leading to garnishment can be reported and affect your credit.
- Job Security: Although it’s illegal for employers to fire you for a single garnishment, multiple garnishments can put your job at risk.
Summing Up!
Facing IRS wage garnishment can be tough, but knowing your rights and options can really help.
It’s important to understand that wage garnishment doesn’t resolve the underlying tax debt, so working towards a long-term solution is necessary for your financial health.
Also, remember that garnishments can continue until the debt is fully paid off or a settlement is reached, so addressing the issue promptly is vital.
So to resolve these challenges associated with wage garnishment, take action early and get advice from a professional who offers tax advisory services to find a way forward and get back on track financially. Get in touch now!
