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

If you don’t pay your taxes, the IRS can levy your bank account, and this process starts with the IRS telling the bank to freeze the funds in your account. When the IRS freezes your account, you cannot use the funds, and you have 21 days to respond before the agency takes the money. 

The bank levy is one of the most dreaded tools in the IRS’ arsenal for collecting taxes. It’s so feared because it means the IRS can swoop in and take money directly from your bank account. This could result in you being unable to pay your bills, which could lead to losing your home, your car, or you otherwise not having the money to provide for your family or support your business. As scary as this scenario can be, there’s usually some warning before the IRS takes money out of your bank account.

Before your bank sends money to the IRS, your bank account will first be frozen for at least 21 days. In this article, we’ll take a closer look at this stage in the bank levy process, including a discussion of how the IRS gets to this point, how to stop a bank levy, the legal authority the IRS has to levy a bank account, and what you can do to unfreeze a bank account. Let’s start by examining what bank levies are and how they work. 

What Is a Bank Levy? 

A levy refers to the legal process where a creditor takes your property to satisfy a debt you owe. Levies shouldn’t be confused with liens, which are legal claims a creditor (such as the IRS) has to someone else’s property to secure the debt. In contrast, the levy is the physical taking of someone else’s property to satisfy a debt.

A bank levy is a type of levy where the property seized is a bank account. The legal authority granting the IRS the power to levy your bank account stems from Section 6331 of the Internal Revenue Code (IRC). This provision states that the IRS can levy any property that a taxpayer owns or for which is subject to a tax lien. The only property off limits from IRS levies is property specifically identified as exempt by the IRC. 

How Does an IRS Bank Levy Work? 

Bank levies don’t come out of nowhere. Before there’s a bank levy, there will be a tax debt. And before using a bank levy to satisfy the tax debt, the IRS will take steps to try and collect that debt. These usually consist of sending multiple letters and notices to you identifying the tax debt and asking that you pay it off in full or make arrangements with the IRS to pay it off over time.

In practice, the IRS typically sends at least four letters before it levies your bank account. However, the IRS is usually only legally required to send just two. The first is a tax bill (often called a Notice and Demand for Payment). This is a letter telling you that you have unpaid taxes and that you need to pay them as soon as you can.

The second notice will be a 30-day Notice of Intent to Levy. This is exactly what you think it is in that it informs you of the IRS’ intent to levy your property and that you have 30 days to contest the levy or otherwise settle your tax debt with the IRS.

There are different types of tax levies, as they can differ based on whether the IRS has identified specific property to levy, who the taxpayer is, or what sort of tax collection process is being utilized by the IRS. Some of the most common types of levy notices from the IRS include:

• CP90: The IRS sends this notice explaining that it intends to levy one or more of your assets to satisfy a tax debt.
• CP91 or CP298: This notice gets sent out when the IRS intends to use a levy to take up to 15% of your Social Security benefits.
• CP297: This is the Notice of Intent to Levy that gets sent to business taxpayers.
• LT11: The Automated Collection System (ACS) usually sends out this Notice of Intent to Levy.
• CP504: This notice lets you know that the IRS wants to levy your state tax refund.

With so many different types of levy notices, the exact name of the notice and its wording will vary somewhat. That being said, you’ll usually get a notice with one of the following titles:

• Notice of Jeopardy Levy and Right to Appeal
• Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing
• Notice of Levy and Your Right to a Hearing
• Final Notice – Notice of Intent to Levy and Notice of Your Right to a Hearing

In rare cases, the IRS won’t send a Notice of Intent to Levy giving you 30 days to respond. Instead, it will levy your property before sending you a notice. There are several potential reasons why the IRS isn’t required to warn you in certain cases, but one of the most common is that the IRS believes sending you the letter risks its ability to seize the property. For instance, if the IRS believes there’s a risk you’ll hide the property or move it so the IRS can’t get it, the IRS may not be legally required to send you a 30-day Notice of Intent to Levy. This is referred to as the collection being in jeopardy.

After you receive this letter from the IRS, you’ll normally have 30 days to contact the IRS to pay your tax debt, make arrangements to pay off your tax debt, or explain why you think the IRS is in error placing a levy on your bank account. If you do none of those things, the IRS will levy your bank account, which begins with it being frozen. 

What Happens When My Bank Account Is Frozen by the IRS? 

When the IRS freezes your bank account, there’s a 21-day waiting period before the IRS can get the money out of your bank account. This gives the bank three weeks to comply with the levy by cooperating with the IRS. It also gives you additional time to stop the levy by negotiating a payment arrangement with the IRS, such as an installment agreement, submitting an offer in compromise, or obtaining currently not collectible (CNC) status.

While your bank account is frozen, you can’t take any money out of it. Even if you wrote a check before the account got frozen, if someone tries to cash it or make a deposit with it after the account freezing, that check will likely bounce.

You can continue making deposits to a frozen bank account and you’ll have access to those new deposits. However, the amount in your account when your account was frozen will continue to be off-limits to you. The IRS can go after deposits you made after the account was first frozen, but they’ll first have to issue a new bank levy.

After the 21-day waiting period is over, if you haven’t taken steps to unfreeze your account, your bank will send the IRS the money from your bank account that’s subject to the levy. 

How Can I Unfreeze My Bank Account? 

The simplest way is to pay off your outstanding tax balance. This is likely easier said than done, as if you had the money to pay your unpaid back taxes, you probably would have paid them off and the IRS never would have levied your bank account in the first place.

If you don’t immediately have the funds to pay your tax bill, you can contact to the IRS to make arrangements to pay off your tax debt over time, such as with a partial payment installment agreement. 

In some instances, the IRS will agree to lift the bank levy if it places an undue financial hardship on you. This isn’t an easy standard to meet and you’ll have to show significant economic strain to get the IRS to stop a bank levy and unfreeze your bank account. Basically, you’ll need to show that if the IRS takes money from your bank account, you literally will not have enough money for food, shelter, and other basic life necessities. To convince the IRS of this, you’ll need to provide information about your finances and economic situation.

Another possibility is arguing that the IRS levied your bank account improperly. For example, you could contend that the IRS didn’t provide you with the proper notices before levying your bank account or tried to collect a tax debt with an expired statute of limitations. In these situations, you could say that the IRS didn’t meet the procedural requirements for a valid bank levy and therefore, must unfreeze your bank account. 

Other times where the IRS may have incorrectly levied your bank account include the IRS placing the bank levy:

• On your bank account too early.
• During a time when the IRS should have stopped or paused collection activities.
• After you already made arrangements to pay your unpaid tax bill.
• On the wrong bank account.

Can the IRS Freeze a Joint Account?

For situations where you’re a joint account holder and the co-owner of the account is the one with the IRS tax debt, your joint bank account may still be subject to the IRS bank levy. This sometimes comes up with married couples or business partners when they have a joint bank account, but only one of them has a tax debt with the IRS. Typically, if both account holders have the right to withdraw the funds from the account, the IRS has the right to seize the funds for just one of the account holders. 

However, in cases where you have a joint account but you can prove that the money is not really yours, you may be able to get the IRS to remove the freeze. This often occurs when people have joint accounts for very specific reasons such as helping an elder parent or a disabled adult child. If this happens, be prepared to show the IRS that the other account holder is the only one who deposits money into the account and the funds are really theirs. Then, they should remove the freeze.

What If the Freeze Was Invalid but the IRS Already Removed the Funds?

If you want to contest the validity of a bank levy but the IRS has already taken money out of your bank account, you’ll need to file an administrative claim and ask the IRS for reimbursement. If the IRS should never have levied your bank account and you incurred a bank fee as a result of the levy, you can ask the IRS to pay for that bank fee. 

However, to succeed on this reimbursement claim, you must show that you took timely and reasonable steps to present your position to the IRS opposing the bank levy. In other words, you can’t ignore the IRS’ notices about unpaid taxes and its intent to levy, then cry foul when a levy takes place (even if the levy wasn’t properly implemented). 

How to Prevent the IRS From Freezing Your Bank Account 

Preventing a bank levy and a frozen bank account is far easier than trying to unfreeze a bank account once the bank levy process has started. So the easiest way to avoid a frozen bank account is to pay your taxes and comply with your tax requirements, like filing necessary tax returns.

But mistakes happen and people sometimes fall on hard financial times. In those situations, you can avoid a bank levy by timely responding to the IRS’s notices and letters trying to collect a tax debt from you. As long as you’re putting an honest effort into negotiating with the IRS about settling your tax issues (or explaining why it’s financially impossible for you to do so), the IRS is unlikely to freeze your bank account. Lastly, avoiding tax fraud or other dishonesty and bad faith behavior with the IRS can dramatically reduce the likelihood of a bank levy. 

Need Help Dealing With a Bank Account Frozen by the IRS? 

If you just learned that the IRS froze your bank account, you need to act quickly. Depending on when you learned about the bank levy, you could have just a few days or a few weeks to take action before the IRS takes your money. If you have a relatively straightforward tax debt with the IRS, you might be able to contact the IRS yourself and reach an agreement concerning your taxes to unfreeze your bank account. 

But if you have a complicated case, or believe the IRS was wrong to levy your bank account, you might need the help of a tax pro. This is where the W Tax Group can help. You can contact us online to set up a free consultation to speak with one of our experienced tax attorneys.