Frozen bank account? Here’s What to Do Next
If the IRS freezes the funds in your bank account, you have 21 days to fix the situation, or your bank will send the money to the IRS. To keep your money, you must pay the taxes in full or prove that the IRS doesn’t have the right to the funds that they have frozen. You may also be able to get the funds unfrozen if you can prove financial hardship or set up qualifying payment arrangements.
To get help now, contact us at Damien’s Law today. We’ll help you understand the options and work with you to put your tax problems behind you. To learn more about what to do if the IRS levies your bank account and how to unfreeze an IRS account levy, keep reading.
What is a bank levy?
A bank levy is when the IRS seizes the funds in your bank account because you have unpaid taxes. When the IRS sends the levy order to the bank, the bank will put a freeze on the funds in your account. You have 21 days to rectify the situation, or the bank will send the money to the IRS.
A bank levy is a type of tax levy, and a tax levy is a process that the IRS uses to seize a taxpayer’s assets for unpaid taxes. There are also wage levies (aka wage garnishments) and asset levies where the IRS takes your real or personal property.
The IRS typically won’t take this drastic measure unless you’ve ignored their previous attempts to collect the debt, such as by ignoring a Notice of Intent to Levy or failing to make payments on an installment agreement. If the IRS does freeze your bank account, you’ll receive a notice in the mail informing you of the levy and giving you information on how to release it.
Why is my bank account frozen?
The IRS can order your bank to freeze some or all of the funds in your bank account if you have unpaid taxes. The unpaid liability may be from a tax return you filed and didn’t pay, it may have resulted from a correction that the IRS made to your tax return, or it may be due to failing an audit. If you didn’t file a tax return and the IRS assessed tax against you, the agency may also freeze your account for those unpaid taxes.
Before freezing your bank account, the IRS must send you a notice of intent to levy. This notice will alert you that the IRS plans to levy your bank account or other assets, and it will inform you of your right to a hearing. If you want to avoid having your account frozen, you must respond to the IRS and make arrangements for your tax debt before the 30 days have passed. If you don’t, the IRS will move forward with the levy.
In some cases, such as a jeopardy levy, the IRS may tell the bank to freeze your fund without giving you the 30-day notice. For example, if the IRS has reason to believe that you might flee the country without paying your tax liability, the agency can move forward with a jeopardy levy.
Note that the IRS doesn’t have to take you to court to levy your bank account. In contrast, most other creditors typically have to take you to court and get a judgment against you before they can seize your assets or bank accounts.
Besides unpaid taxes, there are several other situations that can cause your bank account to be frozen. Most notably if your bank believes that you are using the account for money laundering or crime, they can freeze your account without warning.
Can the IRS freeze all of the funds in my bank account?
Yes, the IRS can freeze all of the funds in your bank account up to the amount of your unpaid tax, interest, and penalties. If your total due to the IRS exceeds the amount in your bank account, the IRS can seize the entire account.
When the IRS sends the notice of bank levy to your bank, the bank must freeze the funds immediately. The bank will freeze any available funds in the account (up to the total of the debt). If you have automatic withdrawals or outstanding checks that hit your account after the freeze is in place, those payments may bounce. To protect yourself, stop all automatic payments and outstanding checks as soon as you realize the funds have been frozen.
Funds Exempt From IRS Bank Levy
That said, there are certain funds that the IRS cannot legally seize. They include the following:
- Unemployment benefits
- Workman’s compensation benefits
- Judgments for support of minor children – the IRS cannot seize funds that you are court-ordered to pay in child support.
- Annuity or pension payments under the Railroad Retirement Act
- Certain service-related disability payments
- Certain public assistance payments
- Assistance from the Job Training Partnership Act
- special pension payments received by a person whose name has been entered on the Army, Navy, Air Force, and Coast Guard Medal of Honor roll
- Annuities based on retired or retainer pay under Chapter 73 of Title 10 of the United States Code.
The IRS also cannot seize funds that belong to another person. If the bank levy has resulted in any of the above funds being frozen, contact the IRS immediately to let them know about the error and to get them to unfreeze the money, or call a tax attorney for help.
Can I use my account while there is a freeze due to an IRS bank levy?
Yes, you can continue to use your account while some of the funds are frozen. The freeze only applies to funds that are in the account the day the bank gets the notice. If you deposit money, the freeze will not attach to those funds. Additionally, if the freeze only applied to part of the balance in your account, you will still be able to use the remaining amount.
In contrast, if your bank freezes your account for criminal activity unrelated to tax debt, you won’t be able to use your account at all. Keep in mind that the IRS bank levy is a one-time levy that temporarily freezes some or all of your funds until the bank sends them to the IRS. A bank account freeze initiated by your bank affects the usage of your account.
How long can the IRS freeze your bank account?
If you prove that the IRS made a mistake, the agency will remove the freeze immediately. If you don’t contact the IRS or if there hasn’t been a mistake, the freeze will last for 21 days, and then, the funds will get sent to the IRS. The freeze does not last forever, and it does not stop you from using your account. The IRS can only do one bank freeze at a time, and if the agency wants to freeze more funds, it must start the process over again.
What if I have a joint bank account?
The IRS can levy all of the funds in a joint bank account if the delinquent taxpayer is a co-depositor with the right of withdrawal. When the IRS sends the levy to the bank, the bank does not consider whether the funds in the account are the taxpayer’s or the other account holders’. Instead, the bank simply freezes all of the funds noted in the levy notice.
Here’s the logic. Under state law, a joint account holder has the right to withdraw all of the funds in a joint account. Thus, the IRS has the right to seize all of the funds in that account if one account holder owes a debt.
If you own a joint account with your spouse and you don’t think that you should be responsible for their portion of the tax debt, you can consider looking into innocent spouse relief. However, once the freeze is in place, you’re unlikely to be able to get it removed by seeking this type of relief. Instead, reach out to the IRS before the freeze occurs. If you’re getting divorced and have tax debt, be proactive about closing your joint accounts.
What if I’m the signatory on an account that has been frozen?
If you are only the signatory on the account, the IRS does not have the right to freeze the funds in the account for your tax debt. If this has occurred, contact the IRS or a tax attorney immediately.
However, people often get confused between signatories and joint account holders. A signatory has the right to sign checks, deposit money, and withdraw funds, but they do not own the account. In fact, if the main account holder dies, the signatory doesn’t have a right to the funds (unless they are listed as a beneficiary).
In some cases, people get confused when they set up their accounts, and sometimes, someone may believe that they are just a signatory but they are actually a joint account holder. In these cases, the IRS may legitimately freeze the account, but if you contact the agency and explain that the funds don’t belong to you, the agency should remove the freeze. You may need to explain the situation and prove that the funds belong to the other account holder.
For example, this may happen if someone is a joint account holder on their elderly parent’s account or on their disabled adult child’s account. Although they are listed as an account holder by the bank, they didn’t deposit the funds into the account, and they act more like a signatory.
Has there been a mistake?
If you believe there’s been a mistake, you can contact the IRS to try and resolve the issue. As indicated above, mistakes include the IRS seizing funds that are exempt from seizure or funds in an account that belong to someone else. Other possible mistakes may include an incorrect tax due amount or a seizure that occurs after you have paid the tax debt in full.
In all cases, contact the IRS as soon as possible if they have made a mistake. Also, consider hiring a tax lawyer to help you with this process, as they’ll be able to give you the best chance of success.
Steps to take if you have a frozen bank account
Here’s what you can do if the IRS has frozen your bank account:
- Make sure that you don’t have any outstanding payments that will be returned by your bank. If so, try to cancel the payments or deposit more money in your account. As needed, contact your mortgage company, landlord, utility provider, etc to make other payment arrangements if you can’t pay your bills from your bank account as usual.
- Double-check that the IRS has not frozen any funds that are exempt, and make sure that the amount of the frozen funds matches the amount that you owe in tax, penalties, and interest.
- Contact the IRS or a tax attorney if the IRS has made a mistake in freezing the funds in your account.
- If you are experiencing financial hardship as a result of the frozen funds, appeal the levy. You can appeal bank levies before and after they are issued. Whenever possible, start the appeal when the IRS sends you the 30-day intent to levy notice, but if your account is already frozen, you can still try to appeal.
- If possible, pay the tax debt in full so that the IRS releases the frozen funds. If you cannot pay in full, contact the IRS and ask if you can set up a payment plan or apply for an offer in compromise. In some but not all cases, the IRS may still be willing to consider these options at this stage of the game.
In some cases, you will not be able to get the account unfrozen. If you can’t get the funds unfrozen, the 21-day waiting period will end, and the bank will send the money to the IRS. If that payment satisfies your full tax liability, you can just move forward. However, if the funds from the bank levy do not cover all of your tax debt, you will need to make other arrangements for the remaining balance, or the IRS may decide to levy your bank account again.
One bit of good news is that the IRS cannot continuously levy a bank account. Once the agency takes funds out of your account, it must send you another levy notice with a 30-day deadline, contact the bank, and give you another 21-day waiting period before it can do a subsequent bank levy.
How to release a bank account levy
To release a bank account levy, you must prove that the IRS made a mistake, pay the tax debt in full, or prove that the levy is causing financial hardship. In some cases, the IRS may stop the levy if you set up payments, but typically, if you ignore your tax bill until the IRS freezes the funds in your bank account, the agency will move forward with taking the frozen funds.
Again, you can also appeal the bank levy through the IRS’s collection appeals program. Most appeals take place over the phone, and during the call, you get to suggest alternatives to the levy. For example, you may explain that you need the funds in your account, but you can cash out another account or sell another asset to pay back the IRS.
Getting a bank levy released can be a tricky process, and for best results, you should consider contacting a tax attorney. Once the IRS has taken the funds, you can get them back in very rare situations, but if you want to protect your assets, you should be as proactive as possible about working with a tax attorney.
Hiring a tax lawyer to help with frozen bank account
If you’re facing a bank levy, it’s always best to hire a tax lawyer to help you through the process. They’ll be able to give you the best chance of success and help you navigate the complex world of tax law. Working with an attorney who can help you resolve the issue with the IRS quickly is a great way to efficiently resolve the issue while protecting your rights.
At Damiens Law, we advocate for our clients. We work closely with our clients to help them get the best outcome possible. We know that tax debt is stressful and having your account frozen can feel unbearable. To get help now, contact us today. Depending on the situation, we can help you unfreeze your account, reduce your penalties, set up payments, or even pay off your balance for less than you owe the IRS.
