When someone owes back taxes, the Internal Revenue Service has a few tools at its disposal to compel this person to pay. Wage garnishments are one option; bank account levies are another. Can the IRS take money out of your bank account? Yes, and it’s perfectly legal to do so. Bank account levies are avoidable, however, if you know what options you have for managing past due tax debts. Talking to a financial advisor can help you create a strategy for minimizing tax liability.
Understanding IRS Bank Levies
The IRS has the power to levy or seize assets when a taxpayer fails to satisfy their tax obligations. The types of assets the IRS can seize include real estate and other tangible assets, as well as bank accounts belonging to the taxpayer. Checking accounts, savings accounts and money market accounts can all be subject to an IRS tax levy.
If the funds in your bank account are enough to satisfy your tax debt then the IRS may stop there. However, if a levy doesn’t cover the amount owed the IRS could garnish your wages or place a tax lien against property you own.
When Can IRS Take Money Out of Your Bank Account?
The IRS can take money out of your bank account when you have an unpaid tax bill, but levies aren’t automatic. If you owe unpaid tax debts to the federal government, the IRS has to follow the proper procedures in order to take money from your bank account.
Generally, the IRS will only resort to a levy once these conditions are met:
- Tax is assessed and the taxpayer is sent a Notice and Demand for Payment.
- The taxpayer fails to pay the tax bill.
- The IRS sends out a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy is set to occur.
- The IRS sends advance notification of Third Party Contact, which says that the IRS may contact third parties regarding a taxpayer’s debt.
If all those requirements are satisfied, the IRS can send a levy notice to your bank requesting funds from your account.
What Happens When the IRS Levies a Bank Account?
Once a levy is issued, the Internal Revenue Code allows a 21-day waiting period before it can be enforced. That waiting period represents your last opportunity to either arrange payment of the tax debt or challenge the accuracy of the tax bill you received.
If you do nothing, then the IRS would be able to take money out of your bank account once the 21 days are up. During the 21-day waiting period, any funds in the account are frozen. Any new funds added after the waiting period begins would still be accessible to you.
Assuming there are no conflicts of ownership with the account, the levy can proceed once the waiting period ends. The bank would then withdraw funds from your account equal to the amount requested in the levy order and send it to the IRS.
It’s also worth noting that levies aren’t limited to bank accounts. The IRS can also take money out of accounts that belong to you but are held by someone else. That includes retirement accounts, dividends, rental income, accounts receivables or cash loan value of life insurance policies.
How Does the IRS Find Bank Accounts for Levy?
There are a few tactics the IRS can use to find your bank accounts when you have unpaid tax debts. The simplest may be to check your old tax returns. If you’ve e-filed returns and requested direct deposit for a tax refund or pay tax bills in the past via an ACH transfer from a bank account, then the IRS may already have everything it needs to proceed with a levy. The direct deposit of tax refunds requires you to enter both your bank account number and routing number, which could make it easy to track you down.
The IRS can also pull your Social Security number from your tax returns to find bank accounts in your name. Most banks require you to provide your Social Security number or taxpayer identification number in order to open a bank account.
How Many Times Can the IRS Take Money From Your Bank Account?
There’s no limit on the number of times the IRS can attempt to levy your bank account for unpaid tax debts. So, changing bank accounts and moving money around typically isn’t an effective strategy for avoiding them.
That being said, the IRS has a 10-year statute of limitations on debt collection. During that 10-year period, the IRS can freely pursue bank account levies against the same person multiple times. However, once the statute of limitations on the debt expires, no new levies can be issued.
How to Stop an IRS Bank Levy
If you receive a Notice and Demand for Payment from the IRS, it’s important to respond to it as soon as possible. That’s the best way to prevent the IRS from taking further steps to take money out of your bank account. Contacting the bank won’t do anything if the levy order has already been issued and your account has been frozen.
How you proceed forward can depend on your situation. Your options for avoiding a levy might include:
- Paying the outstanding tax bill, along with any penalties or interest owed, in full.
- Applying for hardship relief if you can demonstrate that a levy would result in significant financial hardship.
- Working out an installment agreement to pay back what you owe, along with interest and penalties, in a series of scheduled payments.
- Negotiating an offer in compromise, which would let you clear your tax debt for less than what’s owed.
What if you believe that a tax bill has been sent to you in error or that the levy is a mistake? In that case, you’d need to contact the IRS and explain the nature of the error. You’d most likely need to be able to provide some documentation to back up your claim.
If it turns out that the IRS has levied your bank account erroneously, resulting in your bank charging you fees, you might be able to get that money back. You can submit Form 8546, Claim for Reimbursement of Bank Charges, to recover any bank charges if the IRS caused the error, you didn’t contribute to or compound it and, prior to the levy, you responded in a timely manner to all IRS notices.
Receiving a notice for past due tax debts can be scary but a bank account levy doesn’t have to be inevitable. Responding to the notice and taking steps to arrange payment for what’s owed can keep the IRS from dipping into your bank accounts, garnishing wages or taking other collection actions against you.
Tax Planning Tips
- Another good way to avoid an IRS bank levy is not having to owe taxes at all. Talking to a financial advisor can help you formulate a strategy for minimizing your tax liability year to year. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Try using SmartAsset’s federal income tax calculator to help you better estimate what you may owe in taxes for the upcoming year.
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