If you’ve often wondered, “What is a levy on a bank account?” (and are worried about how it could affect you), here are all the facts you need to know.
In this article:
- What Is a Levy on Bank Accounts?
- How Does the Bank Levy Process Work?
- Are There Exceptions to These Rules?
- How Does the IRS Track a Taxpayer’s Bank Account?
- How Is a Bank Levy Avoided?
- Is It Possible to Retrieve Lost Money Due to an IRS Levy?
- Is It Possible to Overturn a Bank Account Levy?
- Do Taxpayers Need a Tax Professional’s Help to Resolve a Bank Account Levy?
What Is a Levy on Bank Accounts and How Is It Imposed by the IRS?
What Is a Levy on Bank Accounts?
A bank levy allows the IRS to legally seize any money a taxpayer has in any type of bank account. The collected amount helps settle outstanding tax owed.
The IRS serves a bank levy only when all set criteria for the penalty have been met by a delinquent taxpayer. In this case, the bank freezes the account holder’s access to their money.
In due time, the money goes straight to the IRS.
How Does the Bank Levy Process Work?
Taxpayers with unpaid taxes receive a series of notices from the IRS — ideally, that is.
You may notice a tone of increasing urgency with every correspondence sent. If a taxpayer neglects to respond to any of these notices, the IRS will then send a Final Notice of Intent to Levy.
These notices are normally sent to a taxpayer’s last known residential address. The IRS can also deliver them to a taxpayer’s work address.
This final notice should alert a taxpayer that the IRS plans to resort to the legal seizure of any asset or property of value, such as a bank account. The collected amount will then cover a taxpayer’s IRS debt.
Taxpayers have 30 days to respond to the Final Notice of Intent to Levy sent by the IRS.
Within this timeframe, back taxes must be paid in full. Or, at the very least, a payment plan must be arranged.
The IRS can legally seize funds from a bank account only if these criteria have been met:
- A tax liability has been detected.
- The IRS has sent a notice demanding payment from a delinquent taxpayer.
- The taxpayer has repeatedly ignored and neglected these notices.
- 30 days have elapsed since the IRS sent a “Final Notice of Intent to Levy.”
As soon as the IRS ticks all of these guidelines, the levy will immediately take effect.
Are There Exceptions to These Rules?
Yes, there are. But these exceptions favor mostly the IRS.
The agency can legally forego the 30-day notice for a right to a hearing. This rule applies to the following cases:
- Collection of a state refund
- The IRS deems tax collection to be in jeopardy because there’s a flight risk
- A taxpayer served with a Disqualified Employment Tax Levy
In these cases, the levy does not have to wait 30 days to take effect.
Disqualified Employment Tax Levy Definition: A type of IRS levy used to collect employment taxes. Taxpayers subjected to this levy are those who have requested a Collection Due Process (CDP) hearing in the past two years, in relation to unpaid employment taxes.
How Does the IRS Track a Taxpayer’s Bank Account?
The IRS uses previous tax returns to track a taxpayer’s banking details. If these are not available, the agency relies on a taxpayer’s social security number to find associated bank accounts.
The agency sends the bank a Notice of Levy on Wages, Salary, and Other Income. The IRS Form 668-A(C)DO is usually used for this purpose.
Banks have no choice but to comply with the notice. Otherwise, the IRS can transfer the tax liability to them.
Here, bank compliance means freezing an account. This results in the account holder being denied access to their money.
A levied bank account stays frozen for 21 days. During this time the account holder can pursue any legal resolution available.
Come the 22nd day of the levy, the funds will directly transfer to the IRS.
Keep in mind that a bank levy only covers the funds available on the day it was filed. Any further deposits made after that date will not be subject to the levy.
To pursue these additional deposits, the IRS must send another Notice of Intent to Levy and follow the same process cited above.
How Is a Bank Levy Avoided?
The best way to avoid a bank levy is to honor the tax rules imposed by the IRS. After all, the agency will not resort to this harsh collection method if it’s not necessary for them to do so.
Taxpayers must file their tax returns on time. More importantly, they must pay their taxes in full and on the specified deadline.
If paying in full is out of the question due to financial constraints, there are tax relief options a taxpayer may consider. For instance, an installment agreement plan can be arranged between a taxpayer and the IRS.
In cases of levied bank accounts wherein the tax debtor is no more than a signatory, the actual account holder should contact the IRS using the telephone number specified on Form 668-A(C)DO. The IRS will ask to be furnished with pertinent documents to assess the veracity of claims relating to wrongly levied bank accounts.
Is It Possible to Retrieve Lost Money Due to an IRS Levy?
Bank funds seized by the IRS will be difficult to retrieve. This is why it is best that taxpayers maximize the 30 days given to them after receipt of the Notice of Intent to Levy, as well as the 21 days in which their account stays frozen.
This timeframe must be used wisely to reach a mutually beneficial agreement with the IRS.
Is It Possible to Overturn a Bank Account Levy?
Yes, it is. One way to do this is by applying for a financial hardship status.
To qualify for a hardship status, a taxpayer must prove to the IRS that paying their outstanding tax debt will put them in a dire financial situation. If satisfying existing back taxes will limit a taxpayer’s ability to pay for basic needs, such as food and housing, the IRS might grant them hardship status.
Do Taxpayers Need a Tax Professional’s Help to Resolve a Bank Account Levy?
It is not a necessity, but working with a tax professional can certainly help. Tax professionals, in the guise of tax lawyers, accountants, or licensed IRS agents provide expert advice that might be of great help to taxpayers served with a bank levy.
These professionals will know which forms need to be submitted to apply for certain tax relief programs. They will also know what documents will prove essential to qualify for these tax relief options.
The question “What is a levy on bank accounts” yields a pretty straightforward answer. That is: It is a tax penalty you should avoid at all costs, by making sure your tax returns are filed and paid in a timely manner.
For questions or concerns, please sound off in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.