What Is a Bank Levy From the IRS?
Understand the IRS bank levy: a federal tax enforcement action. Learn its process and how to navigate this serious situation.
An IRS bank levy represents a serious enforcement action taken by the Internal Revenue Service to collect unpaid tax debts. It involves the legal seizure of funds directly from a taxpayer’s bank account. Understanding the nature of a bank levy and the procedures surrounding it is important for anyone facing potential tax collection issues. This article aims to clarify what an IRS bank levy entails, the steps the IRS takes before implementing one, how it is executed, and the avenues available for taxpayers to seek its release.
Understanding an IRS Bank Levy
An IRS bank levy is a legal process where the Internal Revenue Service seizes funds from a taxpayer’s bank account to satisfy an outstanding tax liability. This action is distinct from a tax lien, which establishes the government’s legal claim to a taxpayer’s property as security for a tax debt. While a lien is a claim against assets, a levy involves the actual taking of property.
The IRS derives its authority to issue levies from federal law. This power allows the agency to seize a taxpayer’s property or rights to property, including financial assets, when a tax debt remains unpaid. The purpose of a levy is to directly collect the amount owed, rather than simply securing the debt.
The IRS typically resorts to a bank levy after other collection attempts, such as sending notices and making payment demands, have not resulted in the resolution of the tax debt. It serves as a powerful collection tool to ensure compliance with tax obligations.
IRS Actions Preceding a Bank Levy
Before the Internal Revenue Service can issue a bank levy, it must adhere to a strict set of procedural requirements and provide the taxpayer with several notifications. The process begins with the IRS sending a Notice and Demand for Payment, informing the taxpayer of the outstanding tax liability. If the debt remains unpaid, additional notices will follow.
A crucial prerequisite for a levy is the issuance of a final notice, often referred to as a Notice of Intent to Levy. This notice informs the taxpayer that the IRS intends to seize property if the tax debt is not resolved. The IRS must typically send this notice at least 30 days before initiating a levy.
During this pre-levy period, taxpayers have specific rights, including the right to a Collection Due Process (CDP) hearing. A CDP hearing allows the taxpayer to dispute the tax liability or propose collection alternatives, such as an installment agreement or an offer in compromise, before a levy is executed. A request for a CDP hearing must be made within 30 days of the Notice of Intent to Levy. If a CDP hearing is requested, the levy action is generally suspended until the hearing is concluded.
The IRS generally considers a bank levy a measure of last resort, employed only after multiple attempts to contact the taxpayer and resolve the debt have been unsuccessful. These preceding actions ensure the taxpayer is fully aware of the outstanding debt and the potential for enforced collection. The agency aims to provide ample opportunity for voluntary compliance before taking such a direct collection step.
How an IRS Bank Levy is Executed
Once the Internal Revenue Service has completed its required pre-levy procedures, it can proceed with the execution of a bank levy. The process begins when the IRS serves a Notice of Levy on the taxpayer’s bank. This official document directs the financial institution to freeze funds in the taxpayer’s account up to the amount specified in the levy.
Upon receiving the levy notice, the bank is required to identify all accounts held by the taxpayer. The bank then freezes the funds in these accounts, up to the amount of the levy or the total balance if it is less than the levied amount.
After freezing the funds, the bank must hold them for a period of 21 days. This holding period allows the taxpayer an opportunity to contact the IRS and resolve the issue or claim any exempt funds. Following the 21-day holding period, if no resolution or claim of exemption has been made, the bank is required to remit the frozen funds directly to the IRS.
Requesting Release of an IRS Bank Levy
Taxpayers whose bank accounts have been subjected to an IRS levy can take administrative steps to request its release or claim exempt funds. The IRS may release a levy if the tax debt is fully paid, with proof of payment facilitating a prompt release.
Another common reason for levy release is the establishment of a formal payment arrangement, such as an installment agreement or an offer in compromise. If the taxpayer successfully negotiates and enters into an agreement to pay the tax debt over time, the IRS may release the levy to allow the taxpayer to meet the terms of the new agreement. Submitting a proposal for an installment agreement with supporting financial information is a common step.
The IRS may also release a levy if it determines that the levy is causing an economic hardship for the taxpayer, preventing them from meeting basic living expenses. To claim economic hardship, taxpayers typically need to provide detailed financial information to demonstrate their inability to meet basic needs. A levy might also be released if it was issued in error.
Certain types of funds are generally exempt from IRS levies, and taxpayers can claim these exemptions to have the funds released. Examples of potentially exempt funds include Social Security benefits, certain unemployment benefits, workers’ compensation, and certain public assistance payments. Taxpayers must contact the IRS directly to inform them of the exempt nature of the funds and provide supporting documentation.