What Bank Accounts Are Exempt From an IRS Levy?

The Internal Revenue Service (IRS) has broad powers to collect unpaid taxes, which can lead to significant concern for individuals regarding their assets. While the IRS can pursue delinquent tax debts, specific limitations and protections prevent certain bank accounts and funds from being levied. Understanding these boundaries is important for anyone navigating tax obligations. This article clarifies how IRS bank levies operate and identifies the types of funds and accounts protected from seizure.

How IRS Bank Levies Work

An IRS bank levy represents a legal seizure of funds from a bank account to satisfy an outstanding tax debt. This collection action allows the IRS to directly access a taxpayer’s assets held by a financial institution. Unlike a lien, which is a claim against property, a levy actually takes the property.

Before initiating a bank levy, the IRS follows a specific procedure. The tax must first be assessed, and the IRS must send a Notice and Demand for Payment. If the debt remains unpaid, the IRS then issues a Final Notice of Intent to Levy and Notice of Your Right to a Collection Due Process Hearing. This notice provides the taxpayer with at least 30 days to respond, pay the debt, or request a hearing to dispute the liability or propose collection alternatives.

Once the notice period expires without resolution, the IRS can execute the levy by sending a Notice of Levy to the taxpayer’s bank. Upon receiving this notice, the bank is legally required to freeze the funds in the account up to the levy amount. These funds are held for 21 days, allowing the taxpayer to seek a resolution. If no resolution occurs within this period, the bank remits the funds to the IRS. The IRS does not require a court order to issue a levy, only adherence to its statutory procedures.

Funds and Accounts Exempt from Levy

While the IRS has significant authority to levy assets, federal law provides specific exemptions for certain funds and accounts, protecting them from full or partial seizure. These protections ensure taxpayers retain access to funds necessary for basic living expenses. The nature of the funds and how they are held can impact their exempt status.

Several categories of income are exempt by law from IRS levy, including unemployment benefits, workers’ compensation payments, and certain public assistance payments. Certain annuity and pension payments, as well as specific service-connected disability payments, are protected. Supplemental Security Income (SSI) is exempt from IRS levy, as are survivor benefits paid to children and lump-sum death benefits. For other Social Security benefits, the IRS can levy up to 15% of monthly retirement and survivor benefits through the Federal Payment Levy Program (FPLP). Manual levies can exceed this 15% limit in rare cases.

The protection of exempt funds within a bank account is compromised if they are commingled with non-exempt funds. If exempt income, such as Social Security benefits, is deposited into an account with other, non-exempt money, identifying the protected portion becomes difficult. To maintain their protected status, keep exempt funds in separate accounts and avoid mixing them with other income sources.

Retirement accounts, such as Individual Retirement Arrangements (IRAs) and 401(k)s, generally receive protection from IRS levies. These accounts are not entirely exempt but have limits on what can be levied. While the IRS can levy retirement accounts, it targets funds if a taxpayer is attempting to liquidate them or for certain types of tax debts.

For joint bank accounts, the IRS can levy the portion belonging to the delinquent taxpayer. The portion belonging to an innocent co-owner is protected. The non-liable co-owner must demonstrate their ownership share, often by providing documentation such as deposit history or pay stubs. In community property states, marital assets in joint accounts may be treated as equally owned, potentially allowing the IRS to access the full balance, even if only one spouse owes taxes. In common law states, ownership is based on who contributed the funds, which may allow for the protection of the non-liable party’s share.

Beyond specific income types, a general exemption for a certain amount of wages and salary is provided to cover living expenses. Taxpayers have a right to claim these exemptions and other protected property. Necessary personal effects, such as clothes and furniture, up to a certain value, are also exempt. Tools necessary for a trade or business up to a specified value are similarly protected.

Protections and Rights Against Levy

Taxpayers have several rights and procedural avenues to prevent or challenge an IRS bank levy. These rights provide opportunities to resolve tax debts or dispute collection actions. Engaging with the IRS proactively is important once a notice of intent to levy is received.

A primary right is the ability to request a Collection Due Process (CDP) hearing. This hearing can be requested after receiving the Final Notice of Intent to Levy, within 30 days. A timely request for a CDP hearing halts most collection actions, including levies, until the hearing is complete. During a CDP hearing, taxpayers can dispute the underlying tax liability or propose collection alternatives.

Various collection alternatives can prevent or stop a levy. An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for a lower amount than what is owed, based on their ability to pay, equity in assets, and income. An Installment Agreement permits taxpayers to make monthly payments over a period, typically up to 72 months, to pay off their tax debt. If the IRS determines that a taxpayer cannot afford to pay their tax debt due to financial hardship, they may be placed in Currently Not Collectible (CNC) status, pausing collection efforts.

Taxpayers can also appeal a levy if it was improper or causes economic hardship. The IRS may release a levy if it determines that the levy prevents the taxpayer from meeting basic, reasonable living expenses. To prove economic hardship, taxpayers need to provide financial information, such as income and expense details, often using Form 433-A. If a levy is deemed wrongful, any funds already taken are returned to the taxpayer.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that assists taxpayers experiencing significant hardship due to IRS actions. TAS can intervene where a levy is causing economic harm or violating taxpayer rights, providing assistance in navigating complex IRS processes and potentially securing a levy release. Taxpayers can contact TAS by phone or by filing Form 911, Request for Taxpayer Advocate Service Assistance.