How Does An IRS Bank Account Levy Work?

Some Common IRS Bank Levy Issues

IRS bank account levyIn most states, bill collectors can bully and threaten, but that is about it. Alas, the Internal Revenue Service is no ordinary bill collector, so it can do a lot of things that private debt collectors cannot do, and that includes an IRS bank account levy.  This all begs the question, how does an IRS bank account levy work?

With the exception of jeopardy levies, taxpayers usually have plenty of notice before the IRS freezes a bank account. There is normally a long series of letters, each one slightly more ominous than the last. Eventually, the IRS sends a “Final Notice of Intent to Levy,” and that’s when things get really serious.

When Can the IRS Seize a Bank Account?

In addition to bank accounts, the Service also has the authority to freeze mortgage escrow accounts, if the taxpayer can make withdrawals from the escrow account or if the taxpayer is entitled to a refund. Procedurally, the government must do the following before it issues an IRS bank account levy:

  • Assess the debt and send the taxpayer a notice to his/her last known address. Note that the taxpayer does not have to actually receive this notice.
  • Assemble evidence that the taxpayer either ignored the warnings or affirmatively refused to pay the taxes due. There is no hard-and-fast rule as to the number of warnings, but the final notice usually comes after at least two years of collection notices.
  • Send the final notice, which says that the IRS will freeze the bank or other financial account in 30 days unless the taxpayer takes action.

Multiple account holders sometimes pose a problem, especially if the other person or entity does not owe delinquent taxes. But in 2014, the IRS changed the rules, so that the agency may levy any account “for which the taxpayer has an unrestricted right to withdraw funds.”

How Much Money Can the IRS Take?

After the 30 days expire, the bank immediately freezes all the money in the targeted account. Then, the bank has twenty-one days to turn over the amount requested in the levy. Most institutions make this transfer at the last possible minute. If the levy amount is less than the account amount (perhaps the taxpayer owed $10,000 and had $12,000 in the bank), the bank then releases any excess funds after it subtracts its fee.

The levy is for an amount of money and not for the account. So, if the taxpayer continues making deposits, this money cannot be accessed because of the freeze, but the IRS will not take it either. However, it’s usually important to keep making deposits to cover outstanding checks and pending automatic drafts.

If the IRS bank account levy creates a financial hardship, the Service must release the levy. The taxpayer must establish that s/he cannot meet reasonable living expenses. Moreover, a portion of current wages, most retirement and government benefits, and some other money is exempt from collection. The taxpayer must establish exempt property types and amounts.

Responding to an IRS Bank Levy

The T-men (and women) usually have very little sympathy for individuals who received a levy notice, because they reasomn that these individuals had plenty of chances to work out their tax debt and/or partner with a tax lawyer, yet they did neither.

On the other hand, an IRS bank levy is a last resort. The government would much rather work out a payment plan or some other arrangement, such as an offer in compromise. So, a levy notice is your opportunity to make such a deal on the most favorable terms possible.

An attorney can quickly evaluate your situation, get the government to back off the IRS bank levy, either in whole or in part, and then negotiate with agents to find a permanent solution that supports your best interests.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.