IRS wage garnishments are the most punitive form of garnishments that exist of any kind, anywhere. I was reviewing tax law and came across some information garnishment information from the IRS, and could not believe how little an individual gets to keep in the event they owe taxes to the federal government.
When a garnishment is properly filed and sent to an individual’s employer, an enormous chunk of each paycheck goes to the IRS (Publication 1494 provides an overview of the exemptions for each specific situation).
Let’s look at an illustration to underscore the point. Imagine you owe $10,000 to the IRS and earn $4,000 per month post-tax, paid biweekly, at the time that a garnishment is sent to your employer.
The IRS lets you keep a base of only $461.54 each time that you receive a paycheck. If you receive two paychecks that month, you are only getting $923.08 via those two paychecks (note: the base is set up so that the standard exemption amount is $1,000 per month).
In this scenario, the IRS gets $3,000 per month to pay down your tax obligation, and you are only left with $1,000 per month to live off. There is no other type of wage levy system in the United States that is nearly this punitive to the debtor.
For each dependent you have, the amount that you can exempt only increases $345.83 per month. There is not much wiggle-room here.
Aside from enduring the garnishment until the tax amount is paid off, you have five realistic options to stop the money being taken from your paycheck:
Make an Offer In Compromise to the IRS. An IRS will consider an offer to compromise if you can show that the IRS won’t otherwise be able to collect on its debt fully (i.e. you indicate that you will no longer be working for your current employer shortly and that you have no assets) and/or that the payment of the tax obligation will cause a hardship (the most convincing argument is that an innocent person in your care will have their needs unmet if you can’t reduce the obligation).
Tax advisors recommend that you make an offer that is at least 60% of the amount owing. If your IRS tax bill is for $10,000, your offer-in-compromise should be for at least $6,000 otherwise it is unlikely that your offer will be accepted.
Request hardship status. If you own a home, but your income level makes it unlikely that you can pay off the taxes without experiencing a hardship, you can fill out an application for a hardship status that will cause the IRS to stop garnishing your pages and place a lien against your property instead.
Apply for an installment agreement. Alternatively, if you are capable of paying the full amount within a multi-year timeframe, you should apply for an installment agreement in lieu of garnishment. In the above scenario, you might offer to pay the IRS $1,500 per month towards your tax obligations, enabling to keep $2,500 of your paycheck instead of $1,000 (and extending the payout time to 8 months instead of 4 months).
Take out a loan to pay off the IRS. If you own a house, some lenders will take out a second lien/mortgage against your property, usually over a fifteen-year term, in exchange for monthly payment of $150-$250 per month in exchange for the funds to pay off your IRS debt.
Appeal the IRS garnishment. If you argue that the IRS is barred from collection because they did not follow proper procedure, such as giving you adequate notice of the garnishment beforehand. Whatever you appeal, the garnishment freezes from the date that your appeal is received until the date of ruling. This can provide some additional time to arrange your affairs.
File for bankruptcy. The filing of bankruptcy will trigger the “automatic stay” provisions of the bankruptcy code, which will automatically stop creditor collections including that from the IRS. This option is only useful if your debt is enormous (over $45,000 for someone earning median U.S. income) and the IRS obligations relate to income taxes and you intend to file a Chapter 7 bankruptcy (this way, you can get a discharge/elimination of the debt rather than a mere delay in the debt).
In one regard, the heavy IRS wage garnishment provisions are useful for addressing the problem–because the exemptions are so low, the debt does get paid off quickly–and my own preference is that I’d rather have sharp and quick pain for months rather than a dull throbbing pain that lasts for years and years. If I designed the IRS garnishment code, I would set the exemption base higher around $1,700 per month rather than the current $1,000 level so that food, rent, utilities, and other bills have a realistic chance of getting paid during this period, but that is not yet the reality.
Benjamin Franklin once said that “a debtor who tries to make partial amends is far superior to the debtor who does nothing in the eyes of the creditor.” Even delayed communications with the IRS to arrange an installment plan or an offer-of-compromise is often the best way to pay off the debts in a way that you can hang onto $1,500-$2,500 of your paycheck per month. An appeal is a useful tactic for temporarily suspending the garnishment until the appeal is resolved. My advice is to communicate to the IRS some articulation of a plan that pays them at least $1,500 per month, and most likely, you will be able to reach a resolution on those terms rather than through the blunt, unforgiving instrument of a wage garnishment that leaves few crumbs for the debtor as an exemption.