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IRS Bank Levy: What to do when the IRS freezes your bank account

IRS Bank Levy: What to do when the IRS freezes your bank account
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It’s no secret that IRS is a tough creditor. As the government, they wield enormous control and resources. I’ve even documented in a previous article about the ruthless collection methods that the IRS can use against you.

Of all the torturous tools the IRS has in its toolbox, the most feared has to be the bank levy (a.k.a the IRS freezing and removing money from your bank accounts.) What makes the bank levy is so dreadful is how intrusive it can be.

If you’ve found your bank account frozen, then you’ve got to act fast. An IRS freeze on your bank account can prevent you from paying for necessities like electricity, food and your other bills.

This article will act as the first step in getting your account back. I’ll equip you with a basic understanding of how to fight an IRS bank levy.

Of course, reading this article alone doesn’t guarantee that the IRS will release the bank levy. Often, you’ll need a qualified tax relief professional to successfully persuade the IRS.

Before we get into how to fight a bank levy, let’s understand what it actually is.

What is an IRS bank levy?

In essence, the bank levy is a method used by the IRS collect on overdue taxes (i.e. when you’ve ignored your tax bills etc.)

It involves the IRS freezing your account, and ultimately the IRS will take funds straight out of your account to pay off your tax debt. Yes, from right under your nose.

Your bank will have no choice but to comply.

What is the IRS bank levy process?

The IRS bank levy process is as follows:

  1. The IRS will issue you a Final Notice to Levy, which tells you of the IRS’ intention to start taking funds out of your account.
  2. After receiving the notice, you have 30 days to:
    • Pay your overdue taxes, or
    • Request for a hearing to appeal the levy

Doing either of these things can stop the IRS from freezing your bank account.

  1. After the 30 days is up, it’s freeze time. The IRS will contact your bank to put a hold on your funds
  2. Your account will remain frozen for 21 days to give you a chance to clarify who owns the account
  3. After the 21 days are up, the IRS will start taking money out of your account.

Here’s an easy win for you:

Remember that the IRS has to follow the above process very closely. You will have grounds to have the bank levy released if you find that they have not complied with the collection procedure.

How do I get an IRS bank levy released?

Let’s say you missed the 30 day window and are now facing a bank levy.  How do you get the IRS bank levy released?

The most effective way to get a bank levy released is simple:

Pay your overdue taxes.

I can hear you smacking your forehead even as I type this. Duh, you say.

It’s okay, I’ve assumed that your financial situation does not allow you to pay your taxes right now, hence this guide.

Thankfully, there are 5 other effective ways to get an IRS bank levy released. Let’s go through them.

How to get an IRS bank levy released

1. Set up a payment plan

A payment plan (also known as an installment agreement) is by far the most common way people can get an IRS bank levy released, especially when they’re not able to pay their tax debt at the moment.

I’ve written extensively on when to use installment agreements and how to set up a payment plan. So I’ll just repeat the necessary basics here.

Essentially, a payment plan allows you to pay your tax debt in monthly payments over a long period of time (72 months in most cases.)

This is a lifesaver because you need only deal with small payment chunks instead of one large one. It’s easy to see how this can make your cash flow infinitely more manageable.

The big kicker is that the IRS cannot levy your bank account when you have:

  • Requested for an installment agreement
  • Have been accepted for an installment agreement
  • Have an installment agreement already in effect

So, if you’re not already on a payment plan. Getting that set up quickly can get you to meet the third requirement above.

I recommend that you read my article on installment agreements or my guide on setting up a payment plan.

2. Set up an Offer in Compromise

An alternative payment option is the Offer in Compromise. Use this if you won’t even be able to make the monthly payments on your installment agreement. It will allow you to offer to settle your debt with the IRS for a smaller amount.

You can read more about offers in compromise or the myriad ways to settle your IRS debt for less than what you owe.

3. Prove that you will face economic hardship due to the levy

Here, you’ll need to prove to the IRS that their levy on your bank account is causing your economic hardship. Economic hardship means that you’re not able to meet basic, reasonable living expenses.

The IRS determines what level of living expenses can be considered “reasonable” for your situation.  They often follow guidelines such as the National Standards on Food, Clothing and other Items. I thought it would be useful to replicate that here:

Expense/month (US$) One Person Two Person Three Persons Four Persons
Food 307 583 668 815
Housekeeping Supplies 30 60 60 71
Apparel & Services 80 148 193 227
Personal Care Products & Services 34 61 62 74
Miscellaneous 119 231 266 322
Out of Pocket Health Care Expenses (under 65) 54 108 162 216
Total 624 1,191 1,411 1,725

 

Now you know what you’re working with. What’s next?

In order to prove economic hardship, you’ll have to call the IRS and provide them with financial information supporting your case. You want to show that by levying your bank account, the IRS has left you with little else to meet the reasonable standards listed in the table above.

What financial information should you use to support your case?

Usually, you’ll need to provide information on your income and expenses, assets and liabilities, and credit facilities etc. This is all fairly ordinary stuff.

However, if you know how to present that information, it can mean the difference between success and failure in releasing the IRS bank levy.

How to present your financial situation is a complicated skill that typically only tax relief professionals possess. This skill is their bread and butter which they keep from sharing online.

Usually, a tax relief expert can work through your numbers and present a convincing story to the IRS that will get your bank levy released quickly.

If you’re looking for a tax relief expert, I recommend Community Tax Relief. You can read my review of Community Tax Relief here. They offer a free no-obligation consultation, and tick all the boxes on what to look for when choosing a tax relief company.

4. Look for administrative failings

As we mentioned earlier in this article, the IRS has a very strict collection process to follow. You may have grounds to have the IRS release your bank levy if the following criteria are met:

  • The IRS levied your bank account prematurely
  • They levied your account before issuing you the proper notices
  • An installment agreement, offer in compromise, or innocent spouse request was under consideration, or was accepted
  • The statute of limitations for collecting your overdue taxes had expired.

There are many more requirements that the IRS must comply with. You can likely find fault with the IRS if you know where to look. This can require hours of research, but is totally worth it if you manage to get the IRS off your back.

If you’re pressed for time however, you won’t have the luxury of research time. In such instances, remember that a tax relief professional like Community Tax knows the IRS inside out and can help you identify any breaches of your rights.

5. Prove that releasing the bank levy will help to pay your taxes

There are hardly any examples of this, so I’ve left it till the end. A more common argument you might make to the IRS is that the IRS need not levy your bank account to collect on your taxes.

This would typically require you to show that you have other resources (like selling off assets) that would assist in paying off your tax debt.

While this is certainly an option, my go-to defense for any IRS collection effort is the installment agreement (our first point in this list). It’s effective, and usually does not require you to disclose much financial information.

Have a read of my article on how to set up an installment agreement.

Conclusion

IRS bank levies are a nasty thing that I wouldn’t wish on anyone. In this article I provided 5 solid ways that you can get the IRS to release a bank levy.

If I haven’t emphasized it enough, then I’ll emphasize it again: the installment agreement is one of the best ways to manage your tax debt by far. Have a read of my primer on installment agreements.

Do let me know in the comments if any of the above methods worked for you. I look forward to hearing about it.