Can the IRS Take Your 401(k)? When Your Retirement Is Actually at Risk

Yes, the IRS can take your 401(k) for unpaid taxes, but it’s very rare. The IRS only seizes retirement accounts after exhausting other options (for example, wage garnishments and levies) or when taxpayers refuse to work with the IRS. 

You can protect your 401(k) by making payment arrangements on your tax debt. 

Key takeaways

• Risk – The IRS can seize 401(k)’s and many other types of retirement accounts, but it’s rare.
• More common actions – The IRS typically focuses on wages or bank accounts rather than seizing retirement accounts.
• Notices – The agency must notify you before seizing any assets with a Final Notice of Intent to Levy and Your Right to a Hearing.
• Options – Protect your retirement account by setting up payments or making other arrangements with the IRS. 

Why the IRS Usually Doesn’t Target 401(k) Accounts

The IRS can seize your assets to cover your unpaid taxes, including your retirement account. However, the agency usually doesn’t take 401(k)s for several different reasons. 

• IRS practices – Generally, the IRS will exhaust all other collection options before seizing your retirement accounts. Instead, they’ll go after wages, bank accounts, or investments held outside of a retirement account. 
• ERISA – The Employment Retirement Income Security Act of 1974 (ERISA) protects 401(k)s and many other retirement accounts from most commercial creditors, even during bankruptcy. Although the IRS is exempt from this rule, the agency still tries to avoid taking retirement accounts. 
• Sensible tax administration – Despite being able to levy retirement accounts such as 401(k)s, the IRS usually won’t resort to this collection process for most taxpayers with unpaid tax accounts. One reason for this is that the IRS understands that taxpayers who have adequate financial resources during retirement are less likely to rely on public assistance when they retire. And most forms of public assistance are funded through taxpayer dollars. 

However, 401(k)’s may be at greater risk than some other types of retirement accounts. That’s because levies only attach to a person’s property if that person has a legal right to access that property. Under the law and the terms of most 401(k)s, you usually have legal access to the funds in your 401(k) at all times. This is true even though you have to pay a penalty if you withdraw funds early. In contrast, the IRS can’t levy deferred annuities or accounts you can’t access. 

When Does the IRS Take 401(k)’s?

One, the IRS will levy a 401(k) or other eligible retirement account if they believe you’ve engaged in “flagrant conduct.” Two, the IRS will sometimes try to pressure taxpayers into accepting a “voluntary” levy on their retirement account, thereby bypassing the flagrant conduct requirement.

IRS Levy Vs. Voluntary 401(k) Levy

To involuntarily seize your 401(k), the IRS typically must establish that you committed flagrant misconduct, but the agency can bypass that step if you agree to let the IRS seize your 401(k). Before agreeing to a voluntary 401(k) levy, reach out to a tax attorney for guidance. Obviously, you don’t want to agree to give up your retirement if you don’t have to.

Although flagrant conduct is not legally defined, the IRS has several examples of what type of behavior is considered flagrant, including: 

• committing tax fraud or evasion.
• helping others commit tax evasion.
• not paying taxes based on frivolous arguments.
• owe taxes from illegal income.
• have been pyramiding unpaid payroll taxes.
• fail to complete a collection information statement if requested by a revenue officer.

Additionally, if you contributed to your account even though you knew you had an unresolved tax bill, the IRS may consider that flagrant misconduct, but not all 401(k) contributions fall into this category. These types of nuances are why it can be critical to have an experienced tax attorney on your side. 

IRS Levy Vs. 401(k) Withdrawls

If the IRS levies your 401(k) or you agree to a voluntary levy, you don’t have to pay the 10% penalty for early withdrawals if you’re under age 59.5. However, the withdrawal will still be considered taxable income, and generally, the IRS will have your administrator withhold tax so you don’t face another unaffordable tax bill. 

In contrast, if you withdraw the funds on your own, you’ll incur the 10% penalty, plus income tax. 

The Process of an IRS 401(k) Levy 

The IRS must give you at least a 30-day warning before seizing your 401(k). The warning letter may not necessarily mention your 401(k) – instead, it will say that the IRS plans to levy (seize) your assets if you don’t take action in the next 30 days. 

If you ignore the notice, the agency can contact your 401(k) administrator to levy the account. The plan administrator will liquidate the securities in your account, place a hold on the funds, and notify you. You have a limited amount of time to dispute the levy – for example, if the IRS didn’t send the right notices. Then, the funds will be sent to the IRS and applied to your tax bill. 

However, it takes a while to get to this stage in the collection process. Here’s an overview of what happens from the time you incur a tax debt until the IRS seizes your 401(k):

• Assessment – This will usually occur when you file a tax return and don’t pay, or if the IRS adjusts or audits your return, leading to a tax liability. 
• Balance Due Notice – The second step occurs when the IRS sends you a notice or letter, such as CP14, informing you of your unpaid tax balance. 
• Payment Demand Notices – Then, you may receive increasingly urgent or serious letters and notices from the IRS asking you to pay your unpaid taxes, including a Notice and Demand for Payment.
• Tax Lien – The third step is where things get more serious. Depending on your situation, the IRS may file a Notice of Federal Tax Lien (NFTL). This provides notice to the general public that the IRS has priority over other creditors when it comes to taking your assets to satisfy a tax debt. In most cases, the IRS won’t file an NFTL unless your tax debt is more than $10,000. 
  Understand that a tax lien can be attached to your property before the IRS files an NFTL. An IRS tax lien is created as soon as you owe tax, but it’s not in the public record until the agency files the NFTL. That means the IRS doesn’t always have to file an NFTL before using a levy to take your 401(k). 

• Notice of Intent to Levy – The IRS must send you a Final Notice of Intent to Levy (for example, LT11 or LT1058) at least 30 days before seizing your retirement account. To prevent the levy, you must pay off your tax debt or make other arrangements with the IRS.
  You can also request a Collection Due Process (CDP) hearing to challenge the validity of the tax debt, but you only have 30 days to request the CDP. 

The 30-day notice and hearing requirement doesn’t apply to all levies. In certain rare situations, the IRS might seize your 401(k) retirement account before giving you 30 days to request a hearing to challenge the levy. Some of these situations include:

• The IRS believes its ability to collect the tax is in jeopardy.
• A disqualified employment tax levy is served.

The IRS also doesn’t have to give you 30 days’ warning before seizing payments to federal contractors, IRS tax refunds, or state tax refunds. 

Challenging the 401(k) Levy 

Most IRS collection actions, including the use of a levy, can be appealed to the IRS Office of Appeals. The exact process can vary, but the instructions on how to present your challenge to the IRS will be on your Notice of Intent to Levy and Notice of Your Right to a Hearing. If you want to file this appeal, you’ll need to act quickly, as you’ll have just 30 days from the date of your Notice of Intent to Levy and Notice of Your Right to a Hearing to request a Collection Due Process Hearing.

If you’re not happy with the decision from the Office of Appeals, you can ask for another review of the levy by the U.S. Tax Court. In situations where the Collection Due Process Hearing isn’t available to challenge the levy, there will be another appeal option, such as the Collection Appeals Program. 

How to Protect Your 401(k) from an IRS Tax Levy 

The best way to prevent the IRS from touching your 401(k) is to settle your tax debt. Ideally, this means paying off your entire debt as soon as you receive a tax bill from the IRS. When this isn’t possible because you lack the funds to immediately pay off your tax balance in its entirety, you can pay off your tax balance over time by making monthly payments to the IRS.

For example, you can set up a short-term payment plan that gives you up to 180 days to pay off the entire unpaid tax amount. Until this happens, you will accrue any applicable penalties and interest. If you need more time, you can ask for a long-term payment plan (also known as an installment agreement).

If you’re an individual taxpayer, you can have up to 120 months to make monthly payments to pay off your tax debt or until the Collection Statute Expiration Date if sooner. During this time, interest and penalties will continue to accrue, although the IRS isn’t allowed to levy your property while you have a current or pending installment agreement.

If there’s no realistic option for you to pay off your tax debt, you have other options. One of the most popular is the offer in compromise (OIC), which allows you to settle your tax debt for less than the full amount. Sounds too good to be true, but it’s not, as the IRS is very particular about who it accepts into the OIC program. As is the case with installment agreements, a pending OIC request or approval into the OIC program will prevent the IRS from placing a levy on your property.

If your inability to pay your tax debt is temporary, you could be eligible for Currently Not Collectible (CNC) status. If you receive CNC status, the IRS agrees to pause its tax collection efforts against you. This pause usually lasts about one year and during this time, penalties and interest will continue adding up. Despite this fact, it offers you a reprieve that can protect your retirement 401(k) account while you find other ways to deal with your tax situation. 

When Can a 401(K) Levy Help?

There are limited scenarios when it may make sense to let the IRS levy 401k proceeds. One such scenario is if the taxpayer would like to resolve the balance using their 401k funds, but is still below the threshold for withdrawing without penalty.

In cases such as these, we have requested the IRS to levy the funds to avoid the 10% early withdrawal penalty. This is a limited circumstance, but for some, it can lead to substantial savings on the withdrawal penalty. Of course, you need to discuss this action with your attorney to exhaust all other remedies before contacting the IRS. 

401(k) FAQs 

Can the IRS withdraw money from my 401(k) without notifying me? 

In most circumstances, no, the agency must notify you before seizing your assets. However, if the IRS believes you might try to hide or transfer the money from your 401(k), then the IRS might use a jeopardy levy. This is very rare, but it allows the IRS to seize your property without first warning you of its intent to levy your property. 

Can the IRS take all the money from my 401(k)?

Possibly, but it depends on how much your tax debt is and how much of your 401(k) you’re eligible to withdraw. In most 401(k)s, you can withdraw all of the money if you wish (subject to early withdrawal penalties and taxes, of course). But some employers offer 401(k)s that prohibit withdrawing money from the account as long as you’re still working for them. In this situation, the IRS may be prevented from taking any money from your 401(k) when using a tax levy. 

Can the IRS levy retirement accounts other than 401(k)s? 

Yes. The IRS can go after many other types of retirement accounts, such as:

• IRAs
• Profit sharing plans
• Qualified pensions
• Stock bonus plans under ERISA
• Keogh, SEP-IRAs, and other retirement plans for the self-employed
• Thrift savings plans

Keep in mind that the exact terms of the retirement plans and whether you have a vested right in the money in those plans will ultimately determine whether the IRS can attach a levy to them. The IRS can even levy your Social Security retirement benefits.

Are there any situations where my 401(k) is safe from the IRS? 

Yes, the IRS cannot seize your retirement account if you have a pending or active installment agreement, offer in compromise, currently not collectible status, or innocent spouse relief. Even if the IRS decides to use a levy to collect money from you, they will typically hold off on placing a levy on a retirement account such as a 401(k) unless you engage in flagrant misconduct or you agree to let the IRS levy your retirement account.

Are there tax consequences when the IRS levies a 401(k)?

If the IRS levies the funds in your 401(k), the withdrawal will typically be considered to be taxable income to you. However, regardless of your age, you will not be subject to the early withdrawal penalty of 10%. 

Protect Your 401(k) and Other Assets from an IRS Levy 

The IRS using a levy to collect an unpaid tax means the IRS is serious about getting its money. And if they’re going after your 401(k), things might be even more problematic. This is because the IRS doesn’t usually try to levy retirement accounts unless they think you’ve acted improperly or the IRS convinced you to agree to a levy on your retirement account.

Regardless of how you found yourself in a situation where the IRS is going after your 401(k), there are things you can do. To learn more about these options and how to take advantage of them, consider the tax professionals at Damiens Law. You can call us at 601-202-4745 or use our online contact form.