Can the IRS Take Money From Your Bank Account? Here’s What to Know

The Internal Revenue Service (IRS) has the authority to collect unpaid taxes, including seizing funds directly from a taxpayer’s bank account through a process known as a levy. Understanding how this process works is crucial for taxpayers aiming to protect their financial assets.

Legal Authority for Account Seizure

The IRS’s power to seize funds from a bank account is established in the Internal Revenue Code (IRC) under Section 6331. This provision allows the IRS to levy property and rights to property belonging to a taxpayer who has failed to pay taxes after receiving a demand for payment. Before initiating a levy, the IRS must send a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing at least 30 days in advance. These notices inform taxpayers of the impending action and provide an opportunity to contest the levy or arrange alternative payment options, such as an installment agreement or an offer in compromise.

Certain assets are exempt from seizure, including a portion of wages, unemployment benefits, and specific annuity and pension payments. The IRS must also comply with the Fair Debt Collection Practices Act, which places restrictions on how and when taxpayers can be contacted, ensuring the levy process is conducted fairly.

Notices the IRS Sends

When the IRS identifies unpaid taxes, it sends a series of notices to the taxpayer. The process begins with a CP14 notice, which outlines the debt, including penalties and interest, and provides a payment deadline. If no response is received, follow-up notices escalate in urgency. The CP501 serves as a reminder, while the CP503 and CP504 warn of potential enforcement actions. The CP504 specifically notifies the taxpayer of the IRS’s intent to levy state tax refunds and pursue further collection measures if the debt remains unpaid.

These notices give taxpayers opportunities to address their obligations by making payments or contacting the IRS to discuss resolution options.

Types of Accounts Potentially Affected

The IRS can levy both checking and savings accounts, as well as investment accounts like brokerage accounts holding stocks, bonds, and mutual funds. Liquidation of these assets involves collaboration with financial institutions to ensure proper valuation and sale.

While retirement accounts, such as 401(k)s and IRAs, are generally protected from creditors, the IRS can levy them under specific conditions. Factors like the taxpayer’s age are considered, as early withdrawals may result in additional taxes and penalties. Business accounts, including those for sole proprietorships and partnerships, can also be targeted if the tax liability is tied to business activities.

Steps the Bank Takes

When a bank receives a levy notice from the IRS, it must freeze the taxpayer’s accounts by placing a hold on the funds. This prevents withdrawals or transfers, and the bank is required to notify the account holder of the levy and the amount affected. The bank holds the funds for 21 days, during which the taxpayer can negotiate with the IRS or contest the levy. If the matter is unresolved within this period, the bank transfers the specified funds to the IRS.

The bank’s role is administrative, acting as an intermediary between the IRS and the taxpayer. It ensures compliance with federal regulations while providing the taxpayer with time to address the situation.

Effect on Joint Accounts

Levying joint accounts can be complex. The IRS assumes all funds in a joint account belong to the taxpayer, even if the co-owner has no tax liability. This means the entire account balance may be frozen. To challenge this, the non-liable co-owner must provide documentation, such as deposit records, to prove their share of the funds. If the co-owner demonstrates ownership of part of the account, the IRS may release that portion, but the process can be time-consuming and does not stop the initial freeze on the account.

When Funds Might Be Protected

Certain funds are protected from seizure under federal law. Social Security benefits, Supplemental Security Income (SSI), and specific veterans’ benefits are generally exempt from IRS levies. Under Section 6334 of the Internal Revenue Code, banks are required to identify and protect these funds when processing a levy. For accounts with direct deposits of Social Security benefits, banks must review the previous two months of deposits and automatically exempt those funds.

If exempt funds are mixed with non-exempt deposits, such as wages or investment income, taxpayers may need to provide additional documentation to clarify the sources of the funds.

Taxpayers experiencing financial hardship may also request a levy release. If the seizure of funds would create undue hardship, such as an inability to pay for basic living expenses, taxpayers can contact the IRS or submit Form 911, Request for Taxpayer Advocate Service Assistance, to explain their circumstances.