Understanding the IRS Levy Priorities: Who Gets Paid First

How does the IRS decide levy priorities and who gets paid first?

When the IRS issues a levy, it uses a legal hierarchy to determine which debts are satisfied first from seized assets. That hierarchy generally gives federal tax claims top priority, but several important exceptions, exemptions, and interactions with state law affect the practical outcome. Understanding this order — and common ways to protect exempt funds or obtain releases — can materially affect your financial outcome.

Note: This article is educational. It summarizes federal levy priorities and common responses; it is not legal advice. For personalized help, consult a qualified tax professional or tax attorney.

Sources: IRS levy guidance (see IRS levy pages) and CFPB materials on garnishment (IRS: https://www.irs.gov/businesses/small-businesses-self-employed/levy; CFPB: https://www.consumerfinance.gov/answers/what-is-wage-garnishment/).

Quick summary of the priority order

• Federal tax liabilities: First claim on assets seized by IRS levies.
• Certain federal claims and interests: In limited cases, other federal debts (for example, certain federal agency debts with statutory priority) may affect disposition.
• State tax liens: State tax authorities may hold their own liens; priority between federal and state claims depends on whether and how liens were perfected and the type of levy.
• Non-tax creditors and judgments: Unsecured creditors and private judgments are lower in priority and are often left unpaid when the IRS enforces a tax levy.

This simplified list helps set expectations, but real cases turn on lien filing dates, the type of asset seized, and state law.

How federal tax priority actually works

1. Federal tax liens attach automatically when a tax assessment is made, but the IRS often files a Notice of Federal Tax Lien (NFTL) to preserve priority against third parties. A filed NFTL typically gives the IRS priority over most unsecured and later-filed secured creditors. (See IRS guidance on liens and levies.)

2. A levy is a separate enforcement tool that allows the IRS to seize property or rights to property (wages, bank accounts, personal property). When a levy collects funds, the IRS applies them to federal tax debt first. That means if you have multiple debts, the federal tax bill will generally be satisfied before many others.

3. Exemptions matter. Some funds are legally protected from levy or only partially subject to collection. Common exempt sources include certain Social Security payments, certain retirement distributions, and a portion of wages necessary for basic living expenses. The IRS follows rules to identify exempt amounts (see IRS rules on exempt income and levy procedures).

Interactions with state tax authorities and other creditors

• State tax agencies may also file liens and attempt levies. Where a federal NFTL is filed and valid, federal law often preempts later state or private claims for the same property. However, state law controls priority for some types of property (real estate rules vary by state) and for how quickly state authorities act.

• Court judgments and private creditors generally come after federal tax liens, except when the creditor has a documented priority interest that pre-dates the tax lien (for example, a first mortgage recorded before the NFTL).

• Child support and some other government-ordered obligations can receive priority through separate legal mechanisms. For example, state child-support levies and federal offset programs operate differently than IRS levy collections.

Common levy targets and priority implications

• Bank accounts (bank levies): The IRS can levy funds in your account; those funds are applied to federal taxes first. The bank typically freezes and holds funds for 21 days before surrendering them. If multiple levies (from state or other creditors) hit the same account, the question of who gets the money depends on timing, the type of levy, and whether the IRS filed an NFTL (see our guide to bank levies).

• Wages (wage garnishment / levy): A wage levy directs an employer to send a portion of your pay to the IRS. The IRS can take a larger share than many private creditors because of federal priority, but it must follow withholding rules and exemptions. For comparisons between wage garnishment and bank levies, see our explainer: Wage Garnishment vs. Bank Levy.

• Social Security and federal benefits: The IRS may levy some federal benefits in certain circumstances, but protections and exempt amounts apply. Consult IRS guidance on levying federal benefit payments.

Interlink: For step-by-step emergency responses to an active bank levy, see “How to Stop a Federal Tax Levy: Emergency Steps to Protect Accounts” (https://finhelp.io/glossary/how-to-stop-a-federal-tax-levy-emergency-steps-to-protect-accounts/).

Practical examples (realistic, anonymized)

Example 1 — Single bank account, two creditors
You have $5,000 in a checking account. The IRS files a bank levy and a state tax agency also issues a levy the same week. If the IRS filed an NFTL and its levy is valid, federal law and procedures typically allow the IRS to apply available funds to the federal tax debt first. Timing and procedural compliance by the bank can change the outcome, so quick action matters.

Example 2 — Wages, mortgage, and tax debt
A homeowner with a preexisting mortgage (recorded before a federal NFTL) faces an IRS levy on wages. The mortgage lender keeps its lien priority on the property; wages are separate property for levy purposes. The IRS will generally apply levied wages to federal tax debt despite the mortgage judgment remaining attached to real property.

In my practice I’ve used these priority patterns to negotiate installment agreements and secure temporary levy releases while preserving client cash flow enough to keep a business operating.

Steps to protect exempt funds and respond quickly

1. Read any IRS notices immediately (CP14, LT11, or Notice of Intent to Levy). Notices explain the assessed tax, your rights, and timeframes. (See IRS Notice LT11 information.)
2. Determine exempt funds. Social Security, certain retirement distributions, and other items may be exempt, fully or partially. Identify and document sources.
3. Contact the IRS Collection office listed on the notice to request a hold, installment agreement, or hardship release. You can often stop a levy by entering a compliant installment agreement or submitting an Offer in Compromise if eligible (see IRS options).
4. If your bank has been levied, consult the bank levy procedures and consider contacting the bank’s legal or collections department to confirm the funds’ status.
5. If appropriate, seek professional help. A CPA, enrolled agent, or tax attorney can request a Collection Due Process (CDP) appeal, file for a Collection Appeal or request a levy release for financial hardship.

Interlink: For immediate steps to challenge a bank seizure, see “Challenging an IRS Levy: Steps to Stop a Bank Seizure” (https://finhelp.io/glossary/challenging-an-irs-levy-steps-to-stop-a-bank-seizure/). Also review “How to Request a Levy Release for Financial Hardship” (https://finhelp.io/glossary/how-to-request-a-levy-release-for-financial-hardship/).

Mistakes that worsen outcomes

• Ignoring notices: Failure to respond accelerates enforcement and limits options.
• Assuming state debts outrank federal taxes: In many cases federal tax liens take priority over later-filed state claims and private creditors.
• Not documenting exemptions: If you don’t document exempt income or hardship promptly, you may lose protected funds.

Professional strategies I use with clients

• Early negotiation: Contacting the IRS before a levy can often produce an installment agreement that prevents seizure.
• Targeted proof of exemptions: I compile bank statements and benefit statements to show exempt sources (Social Security SSA-1099, retirement deposit evidence) to secure quick releases.
• Leverage appeals: Filing a Collection Due Process appeal or requesting a Collection Appeal can buy time and sometimes reverse a levy if IRS procedures weren’t followed.

These tactics do not guarantee results but often reduce harm when used promptly.

Frequently asked questions

Q: Can the IRS levy funds already earmarked for child support or other obligations?
A: The IRS generally applies levied funds to federal taxes. However, separate legal mechanisms such as state child-support levies or federal offsets may apply; consult state authorities and a tax advisor.

Q: If I enter an installment agreement, will the IRS release an existing levy?
A: Often yes. If you become current under the agreement’s terms or set up direct debit installment payments, the IRS commonly releases levies and returns to regular collection monitoring.

Q: Are all Social Security payments safe from levy?
A: Not necessarily. Some Social Security benefits have protection, and exempt amounts may apply, but the IRS can and does levy certain federal benefits in specified scenarios. Documentation and prompt outreach are essential.

Bottom line

Federal tax liabilities have a dominant position when the IRS enforces collection through levies, but the outcome in any case depends on lien filing, the timing of levies, state law, and exemptions. Quick action, accurate documentation of exempt income, and professional negotiation often prevent seizure or limit damage.

If you are facing a levy, start by reviewing the IRS notice, documenting exempt sources, and contacting a qualified tax professional to explore release, installment, or appeal options. For immediate procedures and checklists, consult the IRS levy pages and the referenced FinHelp guides listed above.

Disclaimer: This content is educational and general in nature. It does not substitute for individualized legal or tax advice. For help tailored to your situation, consult a qualified tax professional, CPA, enrolled agent, or tax attorney.

Further reading and official sources:

• IRS — Levies: https://www.irs.gov/businesses/small-businesses-self-employed/levy
• IRS — Notice of Intent to Levy (LT11) guidance
• CFPB/Consumer Finance materials on wage garnishment and debt collection practices

Related FinHelp resources:

• Challenging an IRS Levy: Steps to Stop a Bank Seizure — https://finhelp.io/glossary/challenging-an-irs-levy-steps-to-stop-a-bank-seizure/
• How to Stop a Federal Tax Levy: Emergency Steps to Protect Accounts — https://finhelp.io/glossary/how-to-stop-a-federal-tax-levy-emergency-steps-to-protect-accounts/
• How to Request a Levy Release for Financial Hardship — https://finhelp.io/glossary/how-to-request-a-levy-release-for-financial-hardship/