Can the IRS Overdraft Your Bank Account?
While the IRS cannot force your bank into a negative balance, their collection process has rules that can result in indirect overdrafts. Learn how it works.
The Internal Revenue Service (IRS) has the authority to collect unpaid taxes by seizing funds from a bank account through a levy. However, the IRS cannot directly cause your account to become overdrawn. A levy only attaches to the funds available in the account when the bank processes the notice. If your account balance is less than the tax debt, the IRS receives only what is there, which can trigger a chain of events leading to overdrafts.
The IRS Notice Process Before a Levy
The IRS does not issue a bank levy without prior communication, a process governed by federal law to ensure taxpayers have opportunities to address their debt. The process begins after the IRS assesses a tax liability and sends a notice and demand for payment. If this initial bill is ignored, a series of reminder notices will follow.
A taxpayer will receive several letters, such as the CP14, CP501, and CP503 notices, which serve as initial demands and reminders. The escalation point comes with the CP504 notice, which warns of the intent to levy and may authorize the seizure of state tax refunds.
The final warning is the “Final Notice of Intent to Levy and Notice of Your Right to a Hearing,” sent as Letter 1058 or LT11. This notice is a legal prerequisite and must be sent at least 30 days before a levy can be issued. It advises you of the impending levy and explains your right to request a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals within that 30-day period to negotiate an alternative.
Execution of an IRS Bank Levy
After the 30-day period from the Final Notice expires without resolution, the IRS can send a levy notice to your bank. The bank is then required to freeze the funds in your account. This freeze applies to the money in the account on the day the levy is received, up to the total amount you owe. Deposits made after that day are not subject to that specific levy.
The bank does not immediately send the money to the IRS, as federal law mandates a 21-day holding period. This period allows the taxpayer to contact the IRS to try and get the levy released. If you pay the debt, prove the levy causes an immediate economic hardship, or enter a payment agreement, the IRS may release the funds. After 21 days without a resolution, the bank must send the frozen funds to the IRS.
The IRS only receives the funds that were present in the account, which depletes the balance. If you have outstanding checks or automatic payments scheduled, these transactions will attempt to clear against an account with insufficient funds. This results in bounced payments and overdraft fees from your bank, creating a negative balance that you owe to the bank, not the IRS.
Funds Exempt From an IRS Levy
Federal law and IRS policy exempt certain funds from a levy to ensure individuals can meet basic living needs. Some federal payments are protected through the Federal Payment Levy Program (FPLP). For example, Supplemental Security Income (SSI) payments are legally exempt and are not levied. Other federal payments, such as Social Security retirement and disability benefits, can be levied, but the FPLP automatically limits the levy to 15% of the payment.
As a matter of policy, the IRS does not levy unemployment benefits, workers’ compensation, and some public assistance payments. Additionally, court-ordered child support payments you receive are exempt from levy.
There are also statutory exemptions for personal property. For 2025, this includes up to $11,710 for fuel, provisions, furniture, and personal effects, and up to $5,860 for books and tools for a trade or business. State-level exemptions, such as a homestead exemption, cannot protect property from a federal tax levy.
Options for Resolving an IRS Levy
If you receive a levy notice or your account is already frozen, there are several established paths to resolve the underlying tax debt and secure a release. The most direct method is to pay the tax liability in full. Paying the debt completely will stop all collection actions, and the IRS will issue a levy release to your bank. For those unable to pay in full, other options include:
- Installment Agreement (IA): This is a formal arrangement to make monthly payments over time until the debt is satisfied. Once an IA is approved, the IRS will release the levy. You can apply for an IA online, by phone, or by submitting Form 9465, Installment Agreement Request.
- Offer in Compromise (OIC): An OIC allows certain taxpayers to resolve their liability with the IRS for a lower amount than what they originally owed. This option is granted when there is doubt as to the collectibility of the tax, meaning the taxpayer’s income and assets make it highly unlikely they could ever pay the full amount.
- Currently Not Collectible (CNC) Status: In cases of severe economic hardship, a taxpayer can request to be placed in CNC status. This temporarily suspends collection efforts because the levy would prevent you from meeting basic, reasonable living expenses. You will need to provide detailed financial information to the IRS using Form 433-F or 433-A.
- Collection Due Process (CDP) Hearing: If you are still within the 30-day window of receiving the Final Notice of Intent to Levy, you can formally appeal by requesting a CDP hearing using Form 12153. This pauses the levy action and allows you to negotiate a resolution with the IRS Office of Appeals.