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Outstanding tax debt is one of the most difficult types of debt to eliminate. Bankruptcy doesn’t even wipe out all your back taxes, and the Internal Revenue Service (IRS) and state tax authorities have significant power when it comes to their ability to seize your assets. The IRS can also file a tax levy on your bank account to recoup your tax debt.
A tax levy is a legal procedure the IRS and local government agencies can use to collect on a debt you owe. A levy against your bank account gives the levying agency the right to take funds from that account, as well as prevent you from withdrawing money. Other ways the IRS can recoup your debt include:
If you owe money to more than one creditor, the IRS or local government will take precedence over those creditors. These agencies have more power when it comes to collecting on debts. A credit card issuer or bank would have to meet certain requirements and even win a lawsuit against you, while the IRS can simply file a tax levy and take hold of your assets and property.
However, seizing your assets is a generally a last resort for the IRS and government tax agencies. When you have outstanding tax debt, you will receive written notices from the IRS demanding payment. A tax levy on your bank account will only occur if you have ignored these notices and other attempts to collect on your debt.
The IRS generally cannot take action until 30 days from the date listed on the notice. However, some exceptions to this rule exist. The IRS does not need to wait 30 days to levy your bank account if:
Before it can withdraw funds, the IRS will send a Notice of Levy on Wages, Salary, and Other Income to the bank. The bank must comply with this notice by freezing the funds in your account. The account-freezing process will restrict you from withdrawing that money. The account will remain frozen for 21 days, giving you time to take one of these actions:
If you do not pay within the 21 days, the bank will remit the funds on Day 22 following receipt of the IRS notice. Your bank must comply, or the IRS will hold it responsible for your debt. The IRS can seize the funds in the account on the day it was levied. If you have direct deposits coming into your account, such as paychecks or other earnings, the IRS would have to issue a new levy to get access to those funds.
Any outstanding or pending checks or other payments might bounce if the bank does remit all the funds in your account to the IRS. It’s important to consider those potential payments and make a deposit that will cover them to avoid overdraft fees and other fines associated with insufficient funds in your account.
If the IRS does levy your bank account, it can take all the funds that were in the account when the levy was filed. When using other methods of collection, such as wage garnishment, the IRS can only take a portion to leave you with enough to pay for basic necessities and expenses. However, because a levy on a bank account is a last resort, the bank must turn over any funds in the account to the IRS.
If you cannot pay the full amount you owe, don’t ignore the notices in hopes they will disappear. The IRS will use the tools at its disposal to collect, which can involve a levy against your bank account. However, paying the entire debt at once isn’t your only option. The IRS offers a debt relief program that allows you to make an offer of what you can afford to pay. This option, called an offer in compromise, can reduce the amount you owe. If the IRS accepts your offer, it will consider that amount to be payment in full.
If you don’t qualify for the offer in compromise program or the IRS rejects your offer, you might be able to set up an installment plan to pay back your taxes. You might even believe your debt amount is incorrect, based on filing errors or a lack of information. If this is the case, you can appeal the debt and provide documentation showing why the IRS might be incorrect about what you owe.
Although the IRS legally can levy your bank account, this action is one of the harshest ways to collect on a debt. The IRS will typically only file a levy on your personal account if you do not respond to any attempts to collect. Take action as soon as you receive a notice to avoid having your bank account levied by the IRS.
When you’re dealing with tax debt, the burden can feel impossibly heavy, but you don’t have to face it alone. At Solvable, we have a variety of tools and resources available to help you overcome your debt and enjoy financial freedom.