For many people with an IRS tax liability hanging over their heads, one of their worst fears is logging into their bank account only to see that funds have been frozen or liquidated on account of the bank having received a Notice of Levy (Form 668-A). While the IRS usually has to provide ample notice that they’re attempting to collect on a delinquent tax liability prior to issuing a bank levy, there is typically a short window of time to contest a levy once it’s been issued. Understanding the rules and procedures governing IRS levies can be crucial in heading off an impending levy or getting a levy released after it’s been issued. In this article, I’ve endeavored to provide an overview of the process surrounding the issuance of bank levies by the IRS, as well as your options to deal with a levy once it’s been issued. Note that this article focuses exclusively on manual, one-time levies issued to financial institutions to seize the assets of a delinquent taxpayer. It does not cover continuous levies that the IRS may issue against wages, distributions, social security, and pension income.
When can the IRS issue a bank levy to collect unpaid taxes?
§6331 of the Internal Revenue Code authorizes the IRS to issue levies to collect delinquent tax. §6331 provides that the IRS may issue a levy to collect unpaid taxes 10 days after notice and demand for the payment of the taxes has been sent to the taxpayer by the IRS. The first balance due notice sent by the IRS after a tax liability is generated constitutes the initial “notice and demand” for purposes of issuing a levy. In practice, however, unless the IRS believes that the collection of tax is in jeopardy, a levy or wage garnishment will not be issued until a taxpayer has been issued a “Final Notice of Intent to Levy” (FNOITL). Typically issued as an LT-11 letter, the Final Notice of Intent to Levy is typically sent out several months after a liability is generated, and is preceded by a series of “non-final” collection notices (CP503, CP504, etc.). The CP504 is typically the last, non-final notice of intent to levy issued prior to the issuance of a Final Notice of Intent to Levy.
When the IRS does issue a Final Notice of Intent to Levy, the correspondence will include a Form 12153, which allows a taxpayer to request a Collection Due Process Hearing. If a CDP hearing is requested within 30 days of the receipt of a FNOITL, a collection hold is put in place until the taxpayer has had a chance to conduct an appeals hearing with the IRS to propose a collection alternative (Currently Not Collectible status, Installment Agreement, Offer in Compromise, etc.). If a CDP hearing is not requested within 30 days of the receipt of the FNOITL, a taxpayer becomes exposed to bank levies, wage garnishments, and other collection actions once the 30-day period lapses.
It is important to bear in mind that each individual tax liability has separate due process requirements that must be satisfied before the IRS can take enforced collection action. Say, for example, you have tax balances for tax years 2018 and 2019 and the IRS has only issued an LT11 for 2018, the IRS will only be able to issue a levy for the amount owed for 2018 until they’ve issued a separate FNOITL for 2019 and your appeal rights with regard to that tax year have lapsed as well.
What type of accounts can the IRS levy?
With certain exceptions, any property in which the taxpayer has a fixed, determinable interest is subject to levy. This means that bank accounts, investment accounts, retirement accounts, and even health savings accounts may be levied by the IRS to collect on a delinquent tax debt.
In addition, accounts that are owned jointly with a non-liable taxpayer, or accounts owned solely by a non-liable spouse in community property jurisdictions can also be subject to levy. Generally speaking, custodial accounts over which a liable taxpayer is the custodian are not open to levy to satisfy the debts of the custodian. However, if the IRS believes that a taxpayer has been using a custodial account to transact business or attempt to shield assets from the reach of the IRS, the IRS may pursue the funds in the account under the theory that the account is not truly being held for the benefit of the account beneficiary. Furthermore, in some instances, a financial institution may mistakenly enforce a levy against a custodial account on which the liable taxpayer is listed as the custodian. These levies can typically be reversed, however by demonstrating to the IRS that the account is custodial in nature and has been used exclusively for that purpose.
It is important to reiterate that an IRS levy attaches only to those assets in which the taxpayer has a fixed and determinable interest on the date the levy is issued. This has a couple key implications for bank levies. First, a levy served on a bank or financial institution will only attach to funds that are in the bank or financial institution on the date the levy is received. Therefore, for example, if the IRS issues a bank levy for $50,000 to your financial institution, and there is only $10,000 in the bank account on the date the bank enforces the levy, the levy would attach only to that $10,000. If another $20,000 is deposited into the bank account the following day, those funds would not be subject to seizure under the initial levy received by the bank or financial institution (though the IRS could issue subsequent levies to the bank account). Additionally, the corpus of a pension is generally exempt from levy where the taxpayer does not have a vested, ascertainable interest in the plan.
How will I know if my bank account has been levied?
When the IRS issues a levy against your financial institution, they are supposed to notify the taxpayer via mail that a levy has been issued to one or more of the taxpayer’s financial institutions. However, the IRS will typically wait at least 5 days after sending the Notice of Levy to the financial institution, as the IRS does not want the taxpayer to receive the Notice of Levy prior to the financial institution receiving the order, under the theory that the taxpayer could withdraw the funds from the bank account in question if they’re notified of the levy before the financial institution can place a hold on the account.
Because of the lapse in time between the IRS issuing a notice of levy to the financial institution and mailing a copy to the taxpayer, taxpayers often discover that a levy has been issued to their financial institution by logging into their bank account and seeing that the funds in the account have been frozen. §6332(c) of the Internal Revenue Code requires that banks and other financial institutions hold the funds that are subject to the levy for 21 days from the date they receive the levy notice. While this isn’t a tremendous amount of time to contest the levy, it does provide a taxpayer the opportunity to contest the levy prior to the funds being remitted to the IRS. Understanding your rights and options for contesting the levy can be critical in effectively challenging an IRS bank levy during the 21 day hold period, as after the funds have been remitted to the IRS, it is exceedingly difficult to have them returned.
How can I get an IRS levy released?
There are a few grounds upon which a taxpayer can contest a bank levy and seek to have it released. Due to the timing considerations involved in most bank levies, seeking the release of a bank levy will require the taxpayer or the taxpayer’s representative reaching out to the IRS via phone to request a release of a levy that has been issued.
Liability satisfied: the Internal Revenue Code requires that the IRS release a levy once the tax liability has been satisfied in full. Rarely do situations arise where a taxpayer has been levied and has either already paid the liability in full or would opt to pay the liability in full rather than having a bank account levied, however situations do arise. For example, in situations where the IRS has levied a jointly-held bank account, the liable taxpayer might prefer to pay for the levy out of an individual account, rather than having the joint funds levied. If the IRS levies a taxpayer’s Health Savings Account, the taxpayer might prefer to pay the liability from different funds, as an IRS levy is not considered a qualified distribution from an HSA, so the taxpayer would face an early withdrawal penalty if the funds are levied from an HSA to satisfy the liability. Furthermore, given the pandemic that is ongoing as of the date of this article’s authorship, the IRS is severely behind in processing payments being made via mail. Situations may arise where the IRS issues a levy to collect on a tax liability for which payment has already been sent to the IRS but not yet processed.
CSED expiration: The IRS is prohibited from taking collection action against a balance for which the Collection Statute Expiration Date has lapsed. Though it’s unusual that the IRS would issue a levy against a balance for which the CSED has expired, sometimes the CSED listed for a particular tax balance on the IRS records has been incorrectly calculated. This typically arises in situations where the IRS inputs a code to toll the running of the CSED (such as for a pending Offer in Compromise or Collection Due Process hearing), but does not reverse the freeze code on the proper date. If a tax levy includes a balance that is close to expiration, it is worth reviewing IRS records for that balance to determine whether the liability was still enforceable on the date the IRS issued the levy.
Levy Release Would Facilitate Collection: In certain circumstances, if a taxpayer can demonstrate that releasing the bank levy would facilitate the collection of taxes by the IRS, the IRS will agree to release the levy. Though circumstances where one can demonstrate that releasing the levy would help the IRS collect the tax liability more quickly are rather rare, they do arise. Ultimately, if the bank levy would satisfy the liability in full, or you are unable to demonstrate to the IRS that releasing the levy would allow the IRS to collect more of the balance owed, more quickly, this isn’t a route towards levy release that’s likely to provide much relief.
Showing of Economic Hardship: Under IRC §6343(a)(1)(D), the IRS is required to be released if a taxpayer can demonstrate to the IRS that the levy would result in the taxpayer being unable to meet their basic living expenses. This is the most frequently successful means of getting a levy released. It requires that the taxpayer provide a Collection Information Statement , demonstrating that the taxpayer cannot meet their basic, allowable living expenses under IRS guidelines. Unfortunately, the preparation of a Collection Information Statement can be a time-intensive undertaking, and given the short timeframe a taxpayer has to contest a bank levy, it is often difficult or impractical to prepare a full-fledged CIS along with supporting documentation in the time period required to secure a levy release. At a bare minimum, however, if you believe the levied funds will leave you unable to pay your basic living expenses, it is worthwhile to put together a quick Collection Information Statement. In most instances the IRS will agree to review the financial disclosure over the phone and ask for you to supply only the supporting documentation that may be required to verify items that may be in dispute. It bears mentioning that the IRS is not required to release the entire levy; rather, the IRS may determine that only a portion of the levied funds is required to be released in order to prevent economic hardship. Although this article has focused primarily on an individual taxpayer’s account being levied, in cases where a business taxpayer can demonstrate that the levied funds are necessary to meet the taxpayer’s payroll obligations, the IRS will generally release enough of the funds necessary for the taxpayer to meet their payroll obligations.
Taxpayer has Entered into an Installment Agreement: The IRC requires the IRS to release a levy if the taxpayer has entered into an installment agreement with the taxpayer, unless the agreement allows for the levy. Generally speaking, the IRS will not issue a levy against a taxpayer that is presently in an installment agreement. If they do, and the installment agreement paperwork does not expressly allow the IRS to issue levies while the agreement remains in good standing, the IRS should release the bank levy that was issued. Furthermore, if a bank levy is issued, and it would be preferable to the taxpayer to enter into an installment agreement to satisfy the delinquent tax balance, rather than having the funds levied, the IRS will often agree to release a levy that has been issued if the taxpayer agrees to enter into an installment agreement (though they are generally not required to do so).
Wrongful or Erroneous Levies: If a taxpayer can demonstrate that a levy was wrongfully issued, the IRS will release it. Wrongful levies are those that are issued against property belonging to a third party in which the taxpayer has no rights. For example, if the IRS issues a levy against a legitimate custodial account over which the liable taxpayer is the custodian, the levy should be released as wrongfully issued. Erroneous levies are those that are issued while the IRS is statutorily prohibited from issuing the levy. For example, if the IRS has not provided the taxpayer with adequate due process (e.g. a final notice of intent to levy has not been issued with respect to the balance), or IRS enforced collection is prohibited (such as cases of a pending CDP hearing or Offer in Compromise), the levy can be challenged as being issued in error.
In most instances, the first step to attempting to release a bank levy that has been issued to the IRS is to contact the financial institution enforcing the levy to determine contact information for their department that handles levy releases. Unless a Revenue Officer has been assigned to your case, it is difficult to speak with the same collections representative at the IRS more than once. Therefore, it is helpful to have the contact information for the representative to fax the levy release to the financial institution ahead of time, so that if your petition is successful, the levy release can be sent to the financial institution by the representative handling the claim. After you’ve secured the contact information, prepare whatever information may be necessary to secure a levy release (such as a Collection Information Statement in cases where a hardship release is being sought). Once all the information is in order, one should reach out to the IRS to discuss a levy release. If you are not making any headway with the IRS representative, know that you have the option to request a conference with that employee’s manager, and failing that, to file a Collection Appeals Program (CAP) Appeal. Filing a CAP appeal via Form 9423 will allow you to contest the levy that was filed with a member of IRS Appeals. These appeals are generally expedited, and the IRS will typically put a hold on the pending collection action until the appeal has been conducted. This can be useful in buying some additional time to put together a Collection Information Statement to contest the levy on hardship grounds, for example, and in my experience, IRS appeals agents are much easier to work with than frontline collections employees.
If you’re under the threat of IRS collection action, or your bank account or other financial account has been levied by the IRS, reach out to us today. We can review your situation and determine whether pursuing a levy release is a viable option. We’re ready to act at a moment’s notice in order to put you in the best position possible to have the levy released and the tax liability resolved once and for all.