What happens when the IRS places a Levy on your Bank Account or Brokerage Account:
The money that was in your bank account at the time of levy will be frozen for a period of twenty-one days. A bank must wait 21 calendar days after a bank levy is served before sending payment to the IRS. Then, on the next business day, it must turn over the taxpayer's money. The depositor(s) can waive this waiting period. Saturday, Sunday and federal holidays are included in the 21 calendar day period.
The IRS does not give you a lot of time to act. You have absolutely no time to lose.
Note: The bank will not send money to the IRS that is subject to a bank levy or execution under judicial process. "Bank" includes credit unions, savings and loan associations, trust companies, and others described in IRC 408(n).
During the holding period, an IRS bank levy may be released, or the amount owed on a back tax debt may be decreased. If the bank receives no release (a 668-D form), it must send the payment to the IRS after the holding period. No additional notice is required regarding a bank levy.
Owing the IRS a back tax liability is the start of the IRS collection process, so take action early to prevent penalties and interest on your IRS back taxes. One should find the best solution for your IRS problem before it comes to a point that the IRS triggers enforcement action.
IRS Bank Liaison:
1. The twenty-one (21) day holding period was created to settle disputes about ownership of bank accounts before money is sent.
2. Assign an IRS bank liaison in each territory to settle these issues quickly.
3. Sometimes ownership of the seized account is not settled before the holding period ends. If this happens, ask the bank for more time.
Multiple Signature Authority for a Bank Account:
An IRS levy served on your bank attaches to funds in the bank account for which the taxpayer has an unrestricted right to withdraw funds (signature authority) - even if multiple persons have signature authority for that bank account. As noted in Treasury Regulation 301.6332–1(c)(4) the unrestricted right to withdraw funds is an interest which is subject to levy.
A bank is served with a notice of an IRS levy for an unpaid tax liability due from the taxpayer in the amount of $2,000. The bank holds $2,000 in a checking account in the names of a taxpayer and a third party. Although all of the deposits into the account were made by the third party, the taxpayer has an unrestricted right to withdraw the funds from the account. The bank may send the IRS the entire account balance at the end of the 21 day holding period. The bank is not liable to the third party for any amount, even if the third party proves that the funds in the account did not belong to the taxpayer, because the taxpayer's unrestricted right to withdraw the funds is an interest which is subject to levy.
The third party may, however, seek the return of the funds from the IRS by making an administrative wrongful levy claim under IRC 6343(b) or file a suit under IRC 7426(a)(1) should the administrative claim be denied.
A non-liable third party may claim ownership of funds in a bank account when multiple people hold signature authority for that bank account. Treat this dispute as a potential wrongful levy. A wrongful levy is a levy that improperly attaches property belonging to a third party in which the taxpayer has no rights. See IRM 220.127.116.11.2, Wrongful and Erroneous Levies, for the procedures to follow in these situations.
Please Note: For an IRS bank levy, if additional time is needed beyond the 21 day hold period to determine ownership, a taxpayer can request the bank hold the funds. Provide the potentially wrongfully levied party a deadline date for providing substantiation and provide the bank with a specific extension date to forward the funds.
Provide the potentially wrongfully levied party Form 4528, Making an Administrative Wrongful Levy Claim Under Internal Revenue Code (IRC) Section 6343(b).
If this is the case, our best advice is to contact Flat Fee Tax Service, Inc. Our IRS tax relief team has the experience to handle your IRS levy quickly.
The Money Seized by the IRS, Must be Surrendered:
The bank must send the funds seized in the taxpayer's accounts to the IRS unless a release of levy has been secured. An IRS bank levy attaches to any property or rights to property that belong to the taxpayer or on which there is a federal tax lien, unless it is exempt. See IRC 6331, Levy and Distraint, for legal authority to levy. However, the levied bank must send no more than the amount shown on the notice of levy.
Please Note: By law, banks cannot immediately honor the IRS levy. See IRM 18.104.22.168, Holding Period, for guidance on the holding period after an IRS bank levy.
The notice of an IRS levy only reaches the amount on deposit when the IRS levy is received. Money deposited later is not surrendered, including deposits during the holding period. Another IRS levy must be served to reach this money. Also, the IRS levy only reaches deposits that have cleared and are available for the taxpayer to withdraw.
IRS Levy proceeds must not be reduced by any fee charged by the bank for processing the levy.
Interest on Levy Proceeds:
The bank must turn over the interest earned on the account(s) during the holding period using the same method for figuring the interest it normally would. Even so, the amount paid is no more than the amount shown on the levy. The date the bank normally credits interest to accounts does not matter. If interest is earned, it must be paid over to the IRS. To compute the interest, the bank treats the IRS as though the IRS is the depositor. The money is left on deposit during the holding period. On the day the money is being sent to the IRS, the depositor closes the account.
Some Bank Methods Used to Avoid Paying Interest:
1. Before interest was paid on an IRS levy, some banks:
2. Moved the money seized by the levy from the depositor's account to another account while the depositor was notified, and
3. Paid the depositor no interest while the money was in this "holding" account.
Some banks have rules that they will not pay interest to depositors during holding periods for levies. Both of these methods may result in a change to the terms of the account and not treating the IRS as the depositor because of the IRS levy. These are not grounds to avoid paying interest on levy proceeds.
Income Deposited in a Bank Account:
Part of taxpayer's income is exempt from levy. See IRM 22.214.171.124 Exempt Amount . Once income is deposited in a bank, there is no exempt amount. On the other hand, unlike an IRS levy on wages and salary, a bank levy is not continuous. When an entire paycheck is deposited, an economic hardship may exist because all of the money is levied.
Please Note: See IRM 126.96.36.199.1.4, Economic Hardship, for assistance in determining when a release of an IRS levy is required due to economic hardship. A levy is required to be released when the IRS determines the levy is creating an economic hardship, i.e., the levy will cause the individual to be unable to pay their reasonable necessary living expenses.
Proving to the IRS that a struggling taxpayer has an economic hardship is not easy. It is always more desirable to have an experienced IRS Tax Attorney represent you when negotiating with the IRS.
Twenty-one days is not a lot of time to work with. There may be many factors involved in the release of a bank levy such as:
1. Have you any tax returns that need to be filed?
2. How much do you owe the IRS in back tax debt?
3. Have you previously defaulted on an IRS Installment Agreement?
4. Has a Revenue Officer been assigned to your case?
The able and experienced IRS Tax Attorneys at Flat Fee Tax Service, Inc. work with the enforcement division of the IRS on a daily basis. Our IRS tax relief team is unsurpassed in it's ability to have an IRS levy stopped and released.