Frozen Bank Account Funds? How to Release or Stop an IRS Bank Levy

If you don't pay your taxes, the IRS can confiscate just about anything you own, and usually, the agency starts with wages or bank accounts. Depending on the situation, you may be able to get the IRS to release a bank levy, but whenever possible, it's always easier to avoid a bank levy by setting up payment arrangements. 

Key takeaways

• To prevent a bank levy, set up payment arrangements by the deadline on the final intent to levy notice.
• To get the IRS to release a bank levy or unfreeze your account, prove financial hardship or error.
• If the bank sends the money in your account to the IRS, you can ask for it back, but that's extremeley difficult.

What Is a Bank Levy - What to Expect When You Have Unpaid Taxes

A bank levy is when the IRS seizes the funds in your bank account. First, the agency must send you a Final Notice of Intent to Levy that gives you 30 days to respond. If you don't take action during that time, the IRS will send a levy notice to your bank. At that point, the bank will freeze the funds in your account up to the amount of your balance due. Now, you have 21 days to prove error or financial hardship. If you don't, the bank will send the money to the IRS. 

Has your bank frozen your account for unpaid taxes? If so, you need to act quickly to release the freeze. The following sections explain what to do if your bank account has been frozen. If you have recently received a Final Notice of Intent to levy, you may be able to avoid the bank levy, but you must act by the deadline on the notice. Continue reading to learn more, or use TaxCure to find a local tax professional to help you today.  

What to Do If Your Bank Account Has Been Frozen by the IRS

First, be aware that an IRS tax levy does not freeze your entire bank account. It only freezes some or all of the funds in your account. Although you will not be able to access the frozen funds, you will be able to use your account in general.

Check for outstanding payments - If you have any outstanding checks or automatic payments, make sure that there is enough money in your account to cover them. You may need to make a deposit or cancel upcoming auto payments. When the bank receives the levy notice from the IRS, it will freeze all of the funds in your account up to the amount of your tax liability including penalties and interest. The bank will not consider outstanding payments when placing the freeze.

Ask for help if experiencing financial hardship - Contact the IRS or a tax attorney immediately if the freeze creates financial hardship. The IRS has a fairly narrow view of hardship, and you will generally only be able to get the funds released if you're facing housing instability or going to have your utilities cut off. Often, in this situation, the IRS may only unfreeze the exact amount you need to deal with your hardship.

Get the levy released if it was issued in error - Also, check for errors. If any of the following errors occurred during the levy process, the IRS must release the levy:

• The bank has frozen exempt funds - The IRS is not allowed to seize unemployment benefits, certain types of annuity or pension payments, unemployment benefits, workman's comp, certain service-related disability payments, court-ordered child support, and some other select payments. 
• The IRS did not give you a 30-day warning - The only exceptions to this rule are jeopardy levies (when the IRS thinks the collection of the tax may be at risk) and disqualified employment levies related to unpaid payroll taxes.
• The collection period expired - The IRS only has 10 years to collect unpaid taxes. There are events that pause and extend the timeline so ultimately, the collection period may be longer than 10 years from assessment. However, once the debt expires, the IRS cannot issue bank levies or other collection actions.
• A bankruptcy stay was in place - If you're in the midst of bankruptcy, the IRS and other creditors cannot initiate collection actions during the stay period.
• You just applied for a payment plan or relief option - When you apply for installment agreements, offers in compromise, innocent spouse relief, and some other programs, the IRS must stop collections while reviewing your application.
• You are on an active payment agreement - The terms of your payment agreement dictate that the IRS cannot engage in involuntary collections. Make sure your payment plan is still active and that it didn't go into default without your awareness. 
• The IRS accepted your offer in compromise - Once your offer is accepted, the IRS must stop involuntary collections. However, if you don't pay the offer by the deadline, collections can resume. 
• You were appealing or dealing with a Tax Court case - The IRS also cannot do a bank levy when you're in the midst of an active appeal or Tax Court case. 

The IRS may also release the levy if you prove that the funds belong to someone else. For example, say that you help your aging parents with their finances, and your name is on their bank account. However, all of the money in the account is theirs. In this case, although you technically own the funds by being a joint account holder, the IRS may be willing to release the levy in the interest of equitable tax administration. 

In other cases with joint accounts, however, the IRS may be less willing to remove the levy. To give you an example, imagine you have a joint account with a business partner. Although your partner has put most of the money in the account, you still have legal ownership of the funds, and thus, the IRS may move forward with the levy even if you request that they don't.

What If the Bank Will Not Remove the Freeze

Once the bank freezes the funds in your account, it can be very hard to get the funds released unless you can prove an error or financial hardship as indicated above. If you cannot stop the freeze, the bank will send the money to the IRS at the end of the 21-day period. The funds will go to cover your unpaid tax, interest, and penalties, but the bank will also take a fee for handling the process--usually about $100. 

If the frozen funds cover your full tax liability, you will not owe anything else, and the IRS will also remove any tax liens that have been filed against you. If the money from your bank account is not enough to satisfy your full tax liability, the IRS will continue to enforce collections against you. The agency may garnish your wages, initiate another bank levy, or start seizing real property which may even include your home in some cases. To avoid that, contact the IRS or talk with a tax pro about setting up payments on your remaining balance. 

In rare cases, you can get the IRS to return seized property, including cash from your bank account, but that's a notoriously hard process to navigate especially when you're dealing with liquid funds. 

How to Avoid a Bank Levy

Although releasing a bank levy can be very difficult, it's much easier to avoid a bank levy. However, you must act by the deadline on the Final Notice of Intent to Levy. Note that the IRS may send a few different final levy notices, but the one you really need to pay attention to is the one that outlines your right to a hearing. Once you receive that notice, you have 30 days to do the following if you want to stop the bank levy. 

• Request a Collection Due Process Hearing

  If you have received a Final Notice of Intent to Levy from the IRS, you can stop the bank levy by requesting a Collection Due Process hearing. You must do so within 30 days of the date of the letter or notice. When you appeal, you will get to explain why the levy shouldn't go forward, and you can also suggest payment plans or other resolution options. If you like, a tax attorney, CPA, or enrolled agent can represent you through this process.

• Pay in Full

  If you pay your taxes in full, the IRS will not move forward with the levy or they will release the hold on the funds in your account. Paying in full helps you avoid any more interest or penalties. It will also prevent tax liens from being issued against you.

• Amend Your Tax Return(s)

  If you owe taxes you believe because of a mistake on a tax return, you can elect to amend your tax return showing you do not owe the taxes the IRS claims you owe. 

• Enter into an Installment Agreement

  If you set up an installment agreement by the deadline, the IRS will not move forward with the bank levy. The monthly payments must be enough to pay off the taxes owed before the statute of limitations on collection for a particular tax period expires or within six years if sooner. If you default on your installment agreement, the IRS may threaten levy your bank account again.

• Apply for an Offer in Compromise

  An offer in compromise allows you to lower the amount of taxes you pay to less than the full amount. The IRS only accepts this arrangement for taxpayers who qualify. If the IRS believes it can obtain what you owe them in other ways or thinks you can pay more, they will send you a rejection letter. As this option is complicated, it’s best to work with a tax professional. Take a look at these IRS OIC FAQs or OIC success stories to learn more.

• Request Currently Not Collectible Status

  If you prove that you cannot afford to pay anything right now, the IRS will mark your account as currently not collectible and stop collections against you. As long as you do this by the deadline on the letter, the IRS will not levy your bank account.

  To qualify, you need to provide the agency with detailed financial information. If the IRS approves your hardship application, your account gets labeled as a CNC or uncollectible. It is only a temporary resolution. The IRS reviews the CNC status periodically, and if you file a tax return showing higher income, the agency may demand payment.

• Prove Identity Theft

  If you believe you are a victim of tax-related identity theft that has caused your tax bill, then the IRS is willing to help. In many cases, you will need to set up another resolution with the IRS as this process can take time. You will also need to fill out IRS Form 14039 (Identity Theft Affidavit) and mail it to the IRS. It is always a good idea to have a tax firm or professional help you with tax-related identity theft.

With all of these options, the most important point is to make arrangements before the 30-day deadline on the levy notice. If you do, you will likely be able to avoid the bank levy. If not, you will likely wake up to a frozen bank account in the near future. 

FAQs About Bank Levies

Can the IRS take all the money in my bank account?

The answer is maybe. If you have a delinquent tax debt, the IRS can place a levy on your bank account. If your tax bill exceeds the balance in your bank account, the IRS can seize all of the funds in your account. If you have more in your account than you owe, the IRS will only take the amount you owe including interest and penalties. Your bank may also take a fee. 

How long will the IRS levy my bank account? 

The bank must hold your funds for 21 days before releasing them to the IRS once your bank account is levied. However, an IRS bank levy (unlike IRS wage garnishment), is a one-time levy. For example, if the freeze starts today and you deposit $20,000 tomorrow, the levy will not afect the new funds. However, the IRS can issue another bank levy in the future targeting the same bank account, but it must send the bank a new levy form and then, the bank must hold the funds for 21 days.

What if the IRS refuses to release the levy?

If you request a levy release and the IRS says no, you have the right to appeal. Generally, the IRS cannot initiate any new collection actions while you are appealing, but if your account has already been frozen, the appeal may not stop the levy from proceeding. A tax professional can answer your questions about what to do in this situation. 

Does the IRS need to take me to court to levy my bank account?

No, if you have unpaid taxes, the IRS does not need to go to court to levy your bank account. the agency just needs to follow the notice and procedural rules outlined above. In contrast, most private creditors must take you to court before levying your bank account or other assets. 

Get Help from a Tax Professional

You must act quickly if you're facing an IRS bank levy. Once you discover your bank has frozen the funds in your account, you have up to 21 days before the IRS receives the funds. Once the money is taken, it is usually not returned. Check out these bank levy FAQs to learn more.

Even if you set up an installment agreement or qualify for an offer-in-compromise, it’s often too late once the IRS has taken the funds. The best course of action is to set up payment arrangements as soon as you get the final levy notice or before if possible. To get through this situation, you should reach out to a tax professional who has experience in resolving IRS bank levies by visiting the link or beginning your search below.