Frozen Bank Account? An Overview of IRS Bank Levies
If you have unpaid taxes that you have made no arrangements to pay, the IRS can come after your assets, and one of the most effective tools for doing this is the bank levy, which allows the IRS to take money directly out of your bank account. But before you see money leaving your account, you’ll notice that your account becomes frozen.
If this happens to you, contact McLaud Law P.C. so we can help unfreeze your bank account and remove the IRS bank levy. But remember to act quickly, the funds will be frozen for 21 days, and then, the IRS will take them. If you still have unpaid taxes, the agency may start other collection actions.
Why Bank Accounts Get Frozen
A bank account can become frozen for any number of reasons. Some of these reasons include the account being involved in illegal activity, the account becoming compromised due to fraud, or as part of the probate process after someone has died. However, one of the most common reasons why you might find a freeze on your bank account is because a creditor, such as the IRS, believes you owe them money and you haven’t made the necessary payments. If the IRS freezes your bank account, it will most likely be because the IRS has decided to levy your bank account.
What Is an IRS Bank Levy and How Does it Work?
An IRS bank levy is a process in which the IRS seizes your bank account to take money from that account to pay off a tax debt the IRS believes you owe. The IRS can also levy other property, such as a house, car, or other personal property, but the IRS usually prefers to levy a bank account as it provides them with cash and helps them avoid the extra work of having to sell the property and use the proceeds to pay off the tax debt.
Section 6331 of the Internal Revenue Code (IRC) gives the IRS the legal authority to levy your property if you neglect or refuse to pay a tax owed. The IRS can levy practically any property, as long as you own it or there’s a tax lien on it. The primary exception is property that the IRC specifically identifies as exempt from tax levies. Examples typically include:
- Certain types of pension, annuity, and disability payments.
- Unemployment benefits.
- Workers’ compensation payments.
- Money that’s allocated for child support payments.
Before the IRS resorts to a bank levy, it will try asking you to pay off your tax debt or make arrangements to pay it off over time. In most cases, you’ll receive about four letters or notices from the IRS notifying you about a tax balance and your requirement to pay it off before the IRS levies your bank account. At a minimum, the IRS will send you two letters.
Notices You May Receive Before a Bank Levy
The first IRS notice you’ll receive is the Notice and Demand for Payment, which is a tax bill. This letter provides the amount of the tax debt and any penalties or interest that might have been added to the underlying tax balance. The second letter will be a Notice of Intent to Levy. This document explains that the IRS will levy your property unless you can agree with the IRS (often within 30 days) to pay off your tax debt immediately or over time.
There are different types of Notices of Intent to Levy, but CP504, LT11, and CP90 are among the most common. These usually explain that the IRS may levy any of your assets, including your bank account(s). In some cases, the Notice of Intent to Levy will mention a specific type of property subject to a levy, like with CP91. The CP91 notice explains that the IRS is considering placing a levy on your Social Security benefits.
Assuming you ignore these notices, the IRS will then place a levy on your bank account. When they do this, they won’t immediately take out money from your account. Instead, the IRS will notify your bank about the levy and give the bank 21 days to cooperate with the IRS. This waiting period also gives you more time to figure out how to settle your tax debt with the IRS before the levy is complete. It’s during this waiting period that the funds in your bank account will become frozen.
After this waiting period ends, if you still haven’t contacted the IRS to make arrangements to pay off your tax bill, the IRS will then take the money from your account and apply it to your tax balance.
What to Do If the IRS Freezes Your Bank Account
There are several things you may need to do once you learn about the IRS freezing your bank account. First, see if there are any automatic withdrawals or outstanding checks that could fail to go through because of the account freeze. This might be the case if your insurance company, cell phone provider, or subscription service makes automatic debits each month from your bank account. Naturally, those automatic payments will not happen when the account is frozen.
To prevent penalties, loss of service, or cancellation of insurance coverage, make a different payment arrangement or add sufficient funds to your bank account to cover those payments (the bank levy doesn’t apply to funds added to the account after the bank account is frozen).
Second, see if the IRS made a mistake with the bank levy. This includes not following the proper procedures in issuing the levy or levying too much money. The IRS might levy too much money if the frozen amount exceeds your tax debt or applies to money that’s exempt from a bank levy. If you believe the IRS made a mistake, you can file an appeal. You may be able to handle this appeal yourself, but you might need to hire a tax pro, depending on your situation.
Third, assuming there’s no error with the levy, contact the IRS to make arrangements to pay your tax bill. Ideally, you want to pay it off in full, as this is the simplest option, although likely the most difficult. After all, if you had the funds to pay your taxes, you would have started making payments to the IRS before you ever got a Notice of Intent to Levy.
Even if you can’t pay your whole tax bill immediately, you can make arrangements to pay off your tax debt over time, such as with an installment agreement or payment plan. It may also be possible to settle your tax debt for less than what you owe with an offer in compromise.
How to Avoid Bank Levies
“An ounce of prevention is worth a pound of cure” is an apt saying for IRS bank levies. In other words, you’ll have more options to stop a bank levy from happening in the future than you will have to remove a levy already in place. If you acknowledge that you owe the unpaid taxes that the IRS is trying to collect, negotiating a resolution to that liability (whether a payment plan or other resolution) is the best way to stabilize the situation and prevent the IRS from freezing your bank account.
If you disagree that you owe the IRS any money, then you should explain why to the IRS as soon as you can. The sooner you do this, the more time you’ll have to prevent the bank levy.
Finally, avoid any fraudulent or dishonest behavior. Not only will it prevent possible criminal prosecution, but it gives the IRS less of a reason to issue a bank levy.
IRS Bank Levy FAQs
What if the bank levy creates an economic hardship for me?
If the bank levy would place an undue financial burden on you, the IRS may agree to unfreeze your bank account. Proving an undue financial burden isn’t always easy to meet because you have to show that the bank levy prevents you from paying for basic living expenses. You’ll also need to provide sufficient financial information to support your contention that the bank levy puts a significant economic hardship on you.
What if a joint account gets frozen?
Then both account holders are affected. This is true even if you’ve done nothing wrong and the co-owner of your bank account is the one with the tax problem. This often comes up with married couples, and although innocent spouse relief might seem like an option, it usually won’t work to unfreeze the account. That being said, it can be an effective tool to protect your money before the bank levy is in place.
Generally, when you have a joint account, both account holders own the funds, and thus the IRS can take the funds regardless of whose tax debt was involved and who deposited the money.
However, the IRS isn’t out to hurt people, and it will make reasonable exceptions to this rule. For example, if you are a joint account holder on your disabled adult child’s account. However, all of the money in the account comes from their income, and you only use the account to pay their expenses. In these types of situations, reach out to the IRS, and be prepared to prove that the money isn’t yours. Note that being an authorized signer may be better in these situations than being a joint account holder, and you may want to consider the protection of a Supplemental Needs Trust.
Can the IRS levy my bank account without giving me a chance to pay off my tax debt?
Yes and no. Normally, the IRS has to provide a series of notices to you before they levy your bank account (as discussed above). But in certain instances where the IRS believes you will move or hide your money to prevent the IRS from accessing it, the IRS doesn’t have to send you the Notice of Intent to Levy.
Can I still use my bank account after the IRS freezes it?
Yes, you can still use your account. The account is not frozen, just the funds in the account up to the amount that you owe. This means that you can spend money in your account that got there from a deposit after the start of the bank levy. If the IRS wants to get more money, they will need to initiate another bank levy. A bank levy is a one-time levy.
For example, let’s say you owe the IRS $5,000 and have $7,000 in your bank account. The IRS then levies your bank account preventing you from spending or moving the $5,000. A few days later, you get a direct deposit paycheck from your employer for $2,000. You now have a $9,000 account balance, but the freeze only applies to the $5,000; you can spend or move the $4,000 any way you like.
How much of my money can the IRS take in a bank levy?
The IRS can freeze and levy everything in the account up to your total tax bill, including interest and penalties. So if the amount of money in your bank account is less than your tax debt, the IRS can freeze your entire bank account balance.
What can I do if the IRS makes a mistake with the bank levy?
Your options depend on the type of mistake. If you don’t have a tax debt, yet the IRS froze your bank account, then you can contact them and let them know and the IRS should immediately remove the freeze. This solution also applies in the reverse, where the IRS levies a bank account you have access to (such as you being a signatory to the account), yet the account and its money belong to someone else (who doesn’t have a tax debt).
If the IRS levied the wrong amount, you can contact the IRS to let them know, but you’ll want to have information handy to support your argument.
There may also be situations in which the IRS never should have levied your bank account. Then as a consequence, your bank charged you a fee for the levy. If this happens, in addition to asking the IRS to lift the levy, you can ask the IRS to reimburse you for that fee you wrongly had to pay. One thing to keep in mind about this is that you must not have ignored the IRS’ notices about the levy or unpaid tax bill. The IRS won’t reimburse you for the bank fees if you could have prevented the levy by contacting the IRS before your account was frozen.
If the IRS made a mistake in the procedures it used to levy your bank account, you may be able to lift the levy, even if you still owe the underlying tax balance. For instance, if the IRS didn’t provide you with the legally required notices or time period to respond to the Notice of Intent to Levy before freezing your bank account, then you can likely have the levy removed.
If the IRS has mistakenly taken money out of your bank account, you can seek reimbursement from the IRS by filing an administrative claim.
How to Get Help When the IRS Freezes Your Bank Account
Finding out that your bank account is frozen and the IRS will soon take money out of your account can be a scary experience. Depending on the facts of your case, there are several ways to get the IRS to unfreeze your bank account. You can sometimes handle this on your own, although if you have a complicated tax problem, you should consider getting in touch with the tax professionals of McLaud Law P.C. You can contact us online or by calling 585-397-7785 to set up a consultation so we can help find the best outcome for your tax situation.
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