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When the IRS puts a bank levy on a bank account, it’s not something that’s called to your attention by phone or knocks on the door; it just shows up as a frozen account balance. One day the notice is received at the bank, the checks are bounced and online transfers fail, the next day they are at the bank, and it’s normal.

Knowing precisely how this process works (and the brief time frame the legislation affords to turn back the clock) is the distinction between a settled case and a lost pay cycle.

A bank levy is a single, one-day seizure of the money in a taxpayer’s account for the day the bank receives a Form 668-A, Notice of Levy. A bank levy is different from a wage garnishment, which continues to remove funds from each subsequent paycheck, because it only takes the amount of money in the bank at that particular time; deposits after the levy is placed would not be affected until the IRS issues a new levy.

As per the law, this is the last one of a series of steps. A levy may only be issued following a Final Notice of Intent to Levy and after the IRS has issued a Notice and Demand for Payment and the taxpayer has “neglected or refused” to pay the tax.

The steps of escalation in that case are well-known and are first conveyed through notices, and the bank has no choice but to act upon the notices in the very moment they are received, or it may be held personally liable for the amount not withheld.

Table 1.1 Levy Notice Sequence

The Final Notice is the important document. It begins a 30-day countdown that allows the taxpayer to file for a Collection Due Process (CDP) hearing before the IRS will legally be able to issue a levy (Form 12153, the last IRS formal hurdle before a levy is issued, is the form used for this purpose).

The 30-day time limit is the most important one, for the 30 days following a CDP hearing is a time during which no levy action can be taken while the appeal is pending, a time period often referred to as the “bank hold.

The 30-day time limit is arguably the most important one because the 30 days following the CDP hearing are a period of time when no levy action can be taken while an appeal is pending; the period is known as a “bank hold.

After Form 668-A is filed at the bank, federal regulations (26 CFR 301.6332-3) require that the bank hold the funds frozen — but not surrender — until the completion of the investigation. Unlike a wage garnishment, the money is not lost; this is where a bank levy differs greatly.

IRC Section 6332(c) requires the bank to freeze the money for 21 calendar days after it receives the levy. The bank must send the money (plus interest that accrues) to the Treasury the next business day after the IRS doesn’t tell the bank to release the levy before the end of that time frame.

Table 1.2 Timeline of Bank Levy

This is a structure that is created not just to provide a genuine opportunity for taxpayers to be involved — continuous wage levies don’t provide this opportunity in the same way. Significantly, the bank must look at and block all accounts related to the taxpayer’s identifying number, not only the account listed on the notice, so that the levy can apply to checking, savings, money market and CD accounts at the same time.

Not all funds in an account are equally “safe” to claim, and not all income is equally “safe.

Table 1.3 Limitations of Bank Levy

This is among the most misinterpreted aspects of the bank levy law; many people who are hit by it think that Social Security or retirement funds are protected from it just as they are protected from private creditors.

The rules for federal benefit protection vary by type of benefits received, so taxpayers who depend on Social Security or federal retirement income should have a professional opinion on their individual benefit before they think any amount is off-limits.

There are several protections in play during this process, although the majority mandate some sort of action on the part of the taxpayer:

• Right to a Collection Due Process hearing: If requested within 30 days of the Final Notice, prior to the issuance of the levy.
• Right to request release for economic hardship: When the levy will cause the taxpayer to be unable to afford basic living expenses.
• Right to challenge an incorrect levy: May request a refund of an incorrect levy, using Form 843 (a form of protest) when the wrong taxpayer paid the balance of the tax levy, balance of tax already paid, or otherwise incorrectly valued due to a procedural defect.
• The right to Taxpayer Advocate Service assistance: Through Form 911, which is used for cases involving hardship in need of immediate processing away from the regular processes.
• Right to representation: When filing Form 2848, the taxpayer can authorize an attorney or enrolled agent to act on their behalf in communicating with the IRS.
• Right of appeal: Prior to and following levy, to the Collection Appeals Program (CAP) — a more informal and expedient process than a CDP hearing, but does not provide the same right to petition Tax Court as a CDP hearing.
• Right to ask for the levy: It can be stopped from being reached into the account when the Collection Statute Expiration Date (CSED) is reached, usually 10 years after the levy was put into the account. At this time, the original debt is uncollectible.
• Additional complexity: If one of you is responsible for a tax debt, but the debt is held in a joint account, the IRS can take the money from the account, regardless of which person the debt is owed to, and keep the money even if someone else is responsible.

Table 1.4 Things that can stop a levy

The quickest resolutions almost always occur during the first few days after the freeze because the IRS requires time to scrutinise financial documentation and release Form 668-D, Release of Levy, before the 21-day countdown expires.

Requests made near day 21 present a genuine threat of money being remitted before a release can be done. But a taxpayer is not completely out of luck even if he remittances funds; even if he successfully claims a refund on his Form 843, he can still recover a wrongly levied refund. Still, it will take much longer, and he will have to prove the levy was wrong, not just unwanted.

Because a business operating account may be frozen in a matter of hours by levy, with the bank having to search and freeze all accounts associated with the taxpayer’s Social Security Number or Employer Identification Number, it is easy to understand why the levy is so costly.

This presents a second risk: If payroll is missed, the business owner may also face a separate Trust Fund Recovery Penalty liability in addition to the immediate impact of the missed payroll.

If this is the case for your business, it is important to act quickly and document how your business has been adversely affected (as economic hardship will be a factor in expedited release requests, especially in relation to employee paychecks).

Suppose the bank can provide a clarification on the debt. The bank just knows that a levy exists, not what the tax is or whether any tax is. The bank knows only that a levy exists, and not what it is or if there is a tax.

• Not calling Form 668-A number directly but waiting for a call back.
• Not collecting the financial documentation, thereby pushing the hardship or installment agreement request beyond day 21.
• The cheapest and easiest way to avoid any levy at all is to respond to the Final Notice within 30 days. The best (and least expensive) way to prevent any levy is to respond to the Final Notice within 30-days.
• Takes the same stance on debt as assuming a single levy to get rid of all debt. A bank levy is just for the amount in the bank—once the entire liability is settled, the IRS can levy again from the same or a different account.
• Talking beyond the state-level protections for banks. Some states have minimum protected account balances that are not based on federal requirements, and these can be imposed in addition to a federal resolution.

The IRS bank levy is not permanent, but only temporary — a window of opportunity is provided in federal law (21 days), which is a realistic, workable negotiation period that occurs before the funds are applied to the Treasury. Speed, accuracy in confirming the levy information, account transcript retrieval, and follow-through on the best release path for the taxpayer based on their financial situation make the difference between a restored frozen account and a non-restored frozen account.

IRC §6332(c) requires that banks keep levied funds for a period of 21 calendar days following receipt of Form 668-A before remitting levied funds. This window provides taxpayers an opportunity to negotiate a release, establish hardship, or pay the remaining balance. If no release is received by day 21, the money and interest accrued will be turned over to the Treasury the following business day. Timing is important in the window, as release requests can take several business days to process.

No, legally, the IRS will send the taxpayer a Final Notice of Intent to Levy and wait 30 days to allow the taxpayer to request a Collection Due Process hearing. Many people are shocked, as many are not paying attention to previous notices or receiving them at an old address. After that time, the IRS will proceed directly to issuing the levy to the bank if there’s no response.

No. Unlike a typical sweep, a bank levy will only sweep up the balance at the time the bank receives Form 668-A, not future deposits. This is not a continuous wage garnishment. The take of a levy, though, doesn’t end the collection threat; it only ends the debt collection process when a debt is settled.

Yes. An IRS levy against a joint account can be applied to all funds regardless of who is responsible for taxes on the account. The non-liable party will usually need to have a separate claim and provide evidence of the respective contributions, in order to recover his share after the funds have already been frozen or remitted.