Can the IRS Freeze My Bank Account? What You Need to Know

Summary

The IRS has the authority to freeze funds in a taxpayer’s bank account up to the amount of their tax debt. The IRS typically sends multiple notices before levying an account, giving the taxpayer time to address the issue. There are various reasons for the IRS to freeze an account, such as significant tax debt, non-compliance, or fraudulent activity. If an account is frozen, the taxpayer has 21 days to respond before the funds are sent to the IRS. Options to release a freeze include establishing financial hardship, showing exempt funds, proving non-ownership, negotiating with the IRS, and seeking help from a tax attorney.

Joint bank accounts may also be subject to a freeze. Signs of an impending freeze include a series of notifications from the IRS. Receiving a Notice of Intent to Levy indicates the need for immediate action to avoid the freeze. It’s crucial to consult a tax professional to explore alternatives such as payment plans, liens, wage garnishments, and offers in compromise to resolve the issue with the IRS.

Can the IRS Freeze My Bank Account?

If you don’t pay your tax debt, the IRS has the power to freeze the funds in your bank account up to the amount of your tax debt, and when it happens, you have 21 days to respond before the IRS takes the funds out of your account. 

Generally, it’s much easier to avoid having your funds frozen by addressing your tax debt proactively. However, if your bank account is already subject to a freeze, you still have a few options.

Learn more about how and why the IRS freezes bank accounts—and if you’ve found yourself in this position, gather all of the communication you have from the IRS and call the team at Timothy S. Hart Law Group at 518-213-3445 to set up a consultation.

Can the IRS Freeze the Funds in My Bank Account?

The short answer is yes—the IRS does have the legal authority to freeze the funds in your bank account but only up to the amount of your tax debt plus penalties and interest. The Internal Revenue Code grants the IRS the authority to take a range of collection actions after providing proper notice to taxpayers. In the case of a bank levy, the IRS must provide 30 days notice prior to levying your account.

However, the fact is that it’s actually much longer from the date of your first notice until the actual levy. The IRS sends multiple notices, generally more than a month apart each, before moving forward with a levy.

Why Were the Funds in My Account Frozen?

There are several different reasons the IRS may choose to freeze the funds in your bank account. If you have significant tax debt that you have not made payment arrangements for, they do have the legal right to seize the money you have, and that process starts by telling your bank to freeze the funds in your bank account.

They may also freeze your account if you are non-compliant with other demands, if you ignore IRS communications, or if the account is used to engage in fraudulent activity.

What to Expect If the IRS Freezes the Money in Your Bank Account

When your bank receives a letter from the IRS about the levy, they will immediately freeze the funds up to the amount of your tax debt. If the tax debt exceeds your balance, all of the funds will be frozen.

If you have any outstanding payments (such as direct debits or checks that haven’t cleared), make sure that you stop payment or deposit enough money in your account to cover those payments. Then, consider if there are any steps you can take to remove the freeze from the funds in your account.

During this time, you will be able to use your account normally except for the frozen funds. For example, say your balance is $20,000 and the IRS freeze affects all of it. Then, you deposit your paycheck for $3,000. At this point, you can use the $3,000 just as you usually do. Only the funds in your account on the day that the freeze is initiated will be affected.

How to Release a Bank Account Freeze

If the IRS has frozen the funds in your bank account, you may be able to get the funds released by doing the following. Remember you only have 21 days before the bank sends the money to the IRS:

Establish financial hardship

The IRS may have to release the hold if the freeze causes you financial hardship. If you are likely to be evicted or be unable to feed your family because of the frozen bank account, they may unfreeze the funds.

Show that the IRS froze exempt funds

Certain funds cannot be frozen. Government assistance funds and some types of Social Security benefits may be exempt from the freeze, and you may be able to petition the IRS to release those funds back to you.

Prove that you don’t own the funds in the bank account

If the IRS has frozen the wrong account, you can get the freeze removed. You can also get it removed if you prove that you don’t own the funds in the account – for example, if you share an account with an elderly parent but the money is really all theirs.

Negotiate with the IRS

The IRS may be willing to release your funds to you if you make arrangements to pay off your tax debt another way. For example, if you set up a payment plan with them or request an offer in compromise, they may be willing to remove the hold. Note, though, that this isn’t always possible. It is much easier to do this before the account is frozen—which is why we recommend acting immediately when the IRS contacts you.

Get help from a tax attorney

If you’re uncertain whether or not your bank account holds funds that are exempt from seizure, your next call should be to a tax attorney. This is an intricate area of law, and you’ll want to work with an experienced tax lawyer who can help you figure out the best path forward.

Joint Bank Accounts and Spousal Accounts

The IRS’s authority to freeze bank accounts doesn’t just extend to individual bank accounts. Even if your account is jointly owned with a spouse or other party, the IRS can freeze the funds in the account.

The general rule of thumb is that if you have the legal authority to withdraw the funds from the account, then you own the money, and it can be subject to a freeze for unpaid taxes regardless of who deposited the funds.

As indicated above, the IRS may make exceptions in some cases such as when you have a joint account with a disabled adult child or an elderly parent. But ideally, in these situations, you should be listed as an authorized signer rather than a joint account holder.

Signs Your Money Is Going to Be Frozen by the IRS

The IRS is not quiet about its intent to levy a bank account. The clearest sign that your account is at risk of being frozen is a long stream of notifications that increase in urgency with each new notice. Each notice you receive should indicate the current amount due, broken down into initial tax debt, interest, and penalties. These notices also provide directions on how to communicate with the IRS about potential payment arrangements and what to do if you disagree with the amount owed.

Generally, there are at least five notices that come before your account is actually frozen. These include:

• Notice CP14, a general notice regarding unpaid taxes
• Notice CP501, a follow-up to CP14 that reminds you of your unpaid tax debt
• Notice CP503, a second follow-up reminder with an updated amount you owe
• Notice CP504, Notice of Intent to Levy—official notice that the IRS intends to levy your assets if you do not pay in full or make other payment arrangements
• Letter 1058 or LT11, Notice of Intent to Levy and Notice of Rights to Appeal—The final notice you’ll receive before the IRS moves forward with a levy.

Once you receive a Final Notice of Intent to Levy, it will outline your right to request an appeals hearing. If you want to stop the IRS from levying your bank account, notify the IRS by the deadline on the notice. When you appeal, you can explain how a bank account levy will affect your finances, and you can request other options such as setting up a payment plan or applying for a settlement.

What to Do If You Receive a Notice of Intent to Levy

If you receive a Notice of Intent to Levy, that likely means you’ve already received at least three notices from the IRS regarding the taxes you owe and their collection efforts. You’re typically only one step away from a final notice, and you must take action immediately to avoid having the money in your bank account frozen.

If you’ve received a Notice of Intent to Levy, you should plan on responding immediately. You may have already ignored several notices from the IRS, but you’re now quickly running out of time to respond before you risk asset seizure.

The Importance of Talking to a Tax Professional

You still have time, so it’s crucial to make the most of it by talking to a tax professional. There are many other options available to you beyond having your bank account frozen, but you have to learn about them, figure out which ones are best for you, and work through the application process. With the assistance of a tax pro, you can speed up the application process and avoid having to learn via trial and error.

Alternatives to a Bank Account Freeze

Although the IRS may freeze the funds in a taxpayer’s bank account if they believe it’s the best way to recover what they are due, they may also pursue other collection methods including the following:

Tax Liens

First, the IRS may decide to place a lien on property you own. This does not involve actually seizing the property, but it does give them a legal claim against your property. This makes it difficult to sell or take loans against your property until the lien is cleared. A lien may be placed on your real estate, financial assets, and personal property. The IRS must issue a lien before seizing your bank account.

Wage Garnishments

If you don’t pay your taxes, wage garnishments and bank levies are two of the most popular involuntary collection options used by the IRS. These options are relatively easy for the IRS to implement. They simply send a letter to your bank or employer, and then, they are obligated to comply as directed. The IRS can also garnish some Social Security and pension payments.

Seizing Other Assets

The IRS isn’t limited to just your financial accounts. They may also seize and sell your vehicles, real estate, and any other property of value you own. This may include intercepting your tax refund, taking investment or retirement accounts, and seizing anything else you own.

Resolving the Issue With the IRS

Avoiding a bank account levy is much easier and less time-consuming than attempting to address a levy after it has already occurred. If you reach out to the IRS or begin working with a tax attorney after receiving a Notice of Intent to Levy, you may be able to look into different tax resolution options.

Payment Plan

An IRS installment agreement is one of the easiest and most convenient options for many taxpayers. Most people can apply online and get a decision immediately, which can do a lot to alleviate the stress that comes with a threatened bank account levy. Depending on how much you owe and your ability to pay, you may be able to spread payments out over a period of 72 months.

Offer in Compromise

Taxpayers with limited assets and income may genuinely be unable to pay their tax debt in full but still have enough to make a partial payment. In these situations, an offer in compromise may be the best option. You will need to provide substantial financial information for the IRS to consider your application, and even then, less than half of offer in compromise applications end up accepted. If your application is approved, you can pay your offered amount in one lump sum or over a series of up to 24 monthly payments.

Proving Financial Hardship

When a taxpayer is truly unable to make any payments toward their tax debt, the IRS may consider them currently not collectible. This is more of a temporary solution than a long-term fix; the IRS will periodically revisit your file and request updated financial information. Once they believe you are able to resume payments, they expect you to do so. Penalties and interest continue accruing while you are considered currently not collectible.

Other Negotiation Strategies

The IRS is often open to different payment options and solutions. Their primary goal is to get what they are owed, not to punish taxpayers who have fallen on hard times. This is one reason you should set up a meeting with a tax pro—they can determine which options are best suited to your financial situation and negotiate with the IRS on your behalf.

Other Reasons Your Account May Be Frozen

It’s important to realize that even though the IRS has the authority to initiate a freeze on the funds in your bank account, they aren’t the only agencies or companies with the right to do so. Identifying the source of a frozen bank account is the first step in addressing the issue.

Other Creditors

If you owe money to another creditor and you have not taken steps to make payments, they may take you to court and get a judgment against you. Should the court allow them to levy your bank account, the credit can freeze your bank account and take possession of all of the funds in it.

Court Orders

There are other issues that may result in a court order that freezes your bank account. For example, if you owe a substantial amount of child support arrears, the state may take legal action against you to freeze your account, seize the funds, and use those funds to either pay off your child support or make a dent in your arrears.

Figuring Out the Issues

Generally, contacting your bank directly is the quickest and easiest way to figure out why your account is frozen and which creditor or agency had the authority to do so. Note that this does not result in the funds being released—it simply gives you a starting point to address the issue.

Preventing Future Bank Account Freezes

Once you address the issue at hand and recover access to the funds in your bank account, it’s important to adjust your handling of your taxes to ensure you don’t end up in the same position again. If you ended up behind on taxes because of a surprise tax bill, consider adjusting your withholdings or increasing your estimated quarterly payments to avoid large bills at the end of the year.

Also, ensure that the IRS has your updated contact information and respond promptly to any correspondence they send you. Then, you won’t miss any letters about changes to your tax return or unexpected tax liabilities.

If you opt for a payment plan to catch up and release frozen bank account funds, take steps to ensure that you stay up-to-date on your payment plan. Accruing additional delinquent tax debt, missing payments, or failing to provide necessary documentation can cause your payment plan to default, which means that the total amount is due immediately and you once again risk a frozen bank account.

Frequently Asked Questions

Can the IRS freeze my bank account?

No, the IRS cannot freeze your bank account, but the agency can tell your bank to put a freeze on the funds in your account, up to the amount of your tax debt plus interest and penalties.

Can the IRS freeze my bank account funds without notice?

Generally, the IRS must give you a 30-day notice before initiating a bank levy. Then, your bank will freeze the affected funds for 21 days before sending them to the IRS.

In the case of a jeopardy levy, the IRS can start the bank levy without the required 30-day notice. This is very rare. For example, the IRS may go this route if they think you are about to drain the account and flee the country, leaving them without any way to recover what you owe.

What notices should I look for prior to a bank account freeze?

Watch out for Notices CP14, CP501, CP503, CP504, and Letter 1058 or LT11. These notices increase in severity, and the final two arrive via certified mail.

Can I prevent a freeze on my bank account?

Yes. You can prevent having your bank account frozen by paying your taxes in full and on time. If that is not possible, you can keep your bank account safe by setting up alternate payment arrangements before the IRS takes steps to levy your bank account.

What happens to the money in my account?

If you don’t take action to remove the freeze in 21 days, the money in your account will be transferred to the IRS and used to pay down or pay off your tax debt.

Can I use my account if the IRS freezes the funds?

The freeze only affects the funds in your account (up to the amount of your tax debt). You can still deposit money and use any funds that were not subject to the freeze.

Can the IRS continue to draw money from my account after the initial freeze?

No. Unlike wage garnishments, which allow the IRS to recover funds continuously until your taxes are paid off, bank levies are one-time levies. The IRS may levy your bank account again in the future, but it must once again go through the proper notification steps first.

What if my account is shared with my spouse and my spouse is up-to-date on their taxes?

The IRS still has the legal right to freeze the funds in the account and use all of the money in it to pay off your tax debt.

Can I use a different bank account to avoid asset seizure?

The IRS will easily be able to find any bank accounts that you have, and once they discover the accounts, they can freeze the funds.

What is Form 668-A?

This is the form the IRS sends to the bank to tell them to freeze the funds in your bank account. The IRS may also use this form if it wants to seize assets from other third parties in relation to your tax debt.

A freeze on your bank account is one of the most stressful and financially damaging outcomes of an unpaid tax balance. The IRS does have to go through the proper channels to freeze your bank account, so you should have plenty of notice before your account is frozen.

Once your account is frozen, you do still have legal options that may allow you to address your tax debt and recover access to your funds. If you want to explore these options before your funds are seized, we can help. Contact Timothy S. Hart Law Group online, call our Albany office at 518-213-3445, or call our New York City office at 917-382-5142 to set up a consultation with our team of experienced tax professionals now.