Can the IRS Seize Your Pension or 401K for Back Taxes?
To protect your retirement accounts and retirement income, you need to make payment arrangements on your tax liability before the IRS issues a levy or garnishment.
Yes, the IRS can seize your retirement accounts and/or garnish your pension payments and Social Security benefits for back taxes. Typically, the IRS tries to avoid seizing retirement accounts, but the agency will pursue this collection action as needed.
If you're worried about the IRS taking your retirement funds, you should make arrangements on your tax liability as soon as possible or reach out to a tax professional for help. In the meantime, here is an overview of the rules and general practices, so you know what to expect.
Can the IRS Take Your 401(k) or Other Retirement Accounts?
Legally, the IRS has the right to seize funds from any of the following retirement accounts to cover unpaid tax liabilities:
- Independent Retirement Accounts (IRA).
- Self-employed plans such as SEP-IRAs and Keogh plans.
- Company profit-sharing plans.
- Stock bonus plans under ERISA.
- IRC 403(b) retirement plans.
- Eligible deferred compensation plans.
The IRS can only seize funds that you have the right to withdraw. The IRS can also place a levy against your vested rights, but it cannot accelerate payment.
For example, say that you have a defined-benefit pension plan through your employer, but you don't have the right to withdraw any funds until retirement. The IRS generally cannot seize those funds. In contrast, imagine that you have a 401(k) and you have the right to make a withdrawal at any time. The IRS can levy those funds.
In some cases, you may have a right to the funds in the future, but you cannot withdraw them now. In those situations, the IRS can issue the levy, but the agency cannot seize the funds until you have the right to withdraw the money.
Can the IRS Take Your Pension for Back Taxes?
Generally, if you have the right to withdraw the funds right now, the IRS has the right to seize those funds for back taxes. Similarly, if you have a guaranteed future right to the funds, the IRS may also be able to seize those amounts.
If you cannot make a withdrawal now or don't have a guaranteed future right to your funds based on the vesting rules of your account, the IRS cannot seize those funds. To learn about your particular retirement account, consult with your plan administrator. A tax professional can also help you figure out the rules that apply to your situation.
How Does the IRS Decide Whether or Not to Take Your Pension?
The IRS instructs revenue officers to seize pensions as a last resort. If the revenue officer needs to seize assets to cover your back taxes, they should consider other assets before taking your retirement accounts. In most cases, they should also let you set up a payment plan before seizing your retirement accounts.
However, if you were flagrant about the unpaid taxes, the IRS becomes more likely to seize your retirement accounts. Flagrant means conspicuously or obviously offensive. In relation to retirement accounts and unpaid tax liabilities, the IRS considers several different actions to indicate flagrant behavior.
What Flagrant Behavior Can Lead to the IRS Garnishing Your Retirement Accounts?
If you've engaged in any of the following activities, the IRS revenue officer may decide that you've engaged in flagrant conduct:
- Contributing to your retirement account while not paying your taxes — Note that making automatic contributions based on a low percentage of your income to a 401(k) plan is not flagrant behavior.
- Committing tax fraud or evasion.
- Helping others to commit tax fraud or evasion.
- Owing tax based on illegal-sourced income — By law, you are supposed to report and pay tax on all income. So, if your tax bill is from selling illegal drugs or embezzling money from a company, the IRS becomes more likely to seize your retirement accounts.
- Refusing to provide a Collection Information Statement (CIS) if requested by the IRS.
- Repeatedly failing to take actions to reduce your tax liability — For example, if you owe tax every year and you don't adjust your withholding or make estimated payments, a retirement account levy becomes a bigger risk.
- Having trust fund recovery penalties assessed against you in the past — These are penalties for unpaid payroll taxes withheld from employees' paychecks. If you have incurred trust fund recoveries in the past, the IRS may be more likely to levy your retirement accounts.
- Exhibiting a pattern of uncooperative behavior — The IRS has a lot of resolution options, but if you don't cooperate, the agency will become less willing to work with you.
The IRS also takes into account extenuating factors. If you have suffered an illness, lost a loved one, become unemployed, or been the victim of identity theft, the IRS will be less likely to levy your retirement account.
How Much Can the IRS Garnish From Your Pension or Retirement Accounts?
The IRS can garnish your entire retirement account. As explained above, however, the IRS can only garnish the amount to which you have access. The agency will also consider if you rely on the funds for your current or future income.
How to Protect Your Retirement Account From Being Garnished?
To protect your retirement accounts from being garnished, you should be proactive about setting up a payment arrangement for your tax liability. Here are the most popular options and links to more information.
- Installment Agreement — Make monthly payments on your tax liability for up to six years until it is paid in full.
- Partial Payment Installment Agreement — Make monthly payments on your tax liability until the collection statute expires, and then the IRS will settle the rest of the liability.
- Hardship status — Get the IRS to mark your account as currently not collectible and stop collection actions against you.
- Offer in compromise — Prove to the IRS that you cannot afford to pay the tax liability in full and convince the agency to settle for less than you owe.
Depending on your situation, you may also be able to apply for innocent spouse relief or request penalty abatement. A tax pro can help you identify the best resolution method to protect your retirement accounts and other assets from being seized.
Retirement Benefits the IRS Cannot Levy
Again, the IRS cannot levy retirement accounts that you cannot access. Levies can only attach to fixed and determinable rights. In other words, if your rights to your retirement account are not guaranteed yet or if the amount is not determinable, the IRS cannot seize those accounts.
Additionally, the IRS cannot take the funds you need now or in the near future. The IRS uses financial standards that outline basic living costs to assess this — these standards are not generous. Ideally, you should make arrangements to take care of your tax liability before the IRS starts holding you to these standards.
The IRS also takes into account longevity tables. Basically, the agency considers standard life expectancies and very minimal living costs. If your retirement account can cover more than those essentials, the IRS can seize the rest. The agency will also consider extenuating factors about your budget and any other retirement money you have.
Taxation of Levied Retirement Accounts
If the IRS levies your retirement account, you will be taxed on the distribution as usual. The plan administrator will typically withhold 20% of the distribution for federal income taxes, but your exact tax rate will vary based on your income.
For instance, if you have $5,000 in a retirement account, the IRS can levy all of that, but once the plan withholds 20%, the IRS will only receive $4,000. Even if you ultimately owe less than this amount of tax, the IRS only has the right to levy the $4,000.
Retirement Account Levies and the 10% Early Withdrawal Penalty
Normally, you face a 10% penalty when you take a distribution from your retirement account before reaching age 59.5 years. The 10% penalty does not apply in this case.
When the IRS sends you a notice of levy for your retirement account, the agency will also send a letter explaining that you are not subject to this penalty. You may receive Letter 3257 (Excise Tax for Early Withdrawal Not Due if by Levy to Retirement Plan Administrator) and Letter 3258 (Excise Tax for Early Withdrawal Not Due if by Levy to Taxpayer).
You can show these letters to your plan administrator, so they know you are not subject to the 10% penalty. You may also need these letters when you file your tax return.
Bankruptcy and Retirement Account Levies
Taxes must meet specific rules to be discharged through bankruptcy. If you have taxes discharged in bankruptcy, the IRS may still have the ability to levy your retirement accounts to cover those taxes.
If the IRS filed a tax lien before you filed bankruptcy, the IRS has the right to seize accounts that were exempt from the bankruptcy case. Additionally, the IRS also seize retirement accounts that were excluded from bankruptcy even if the liens were not filed on time.
Garnishment of Social Security Benefits
The IRS also has the right to garnish your Social Security retirement income. The agency can garnish up to 15% of your Social Security benefits, but it cannot take lump-sum death benefits or benefits paid to children. Additionally, if you only receive partial benefits due to repaying a liability to Social Security, the IRS won't levy those benefits.
Before levying your monthly Social Security benefits, the IRS will send you Notice CP 298 (Final Notice Before Levy on Social Security Benefits) or a similar notice. Once you receive the notice, you have 30 days to make arrangements. If you set up a payment plan or make other arrangements, the IRS won't start the levy.
The IRS has the right to garnish 15% of your benefits, regardless of how much you receive. But if the garnishment causes you financial hardship, you can apply to have it removed. The IRS uses a strict set of financial criteria to assess hardship. Just because you feel strained doesn't mean the IRS will agree.
Garnishment of Pension and Retirement Payments
The IRS can also garnish any pension plans or payments you're receiving from your retirement accounts. There is a common misbelief that the IRS will only garnish 25% of your pension payments. This is not true.
Pension payments and other payments from retirement accounts are subject to the same rules as other IRS wage garnishments. Basically, the IRS only has to leave you with enough money for living expenses, and then the agency can garnish the rest.
Get Help With Back Taxes
Don't let the IRS levy your retirement accounts or garnish your pension payments. The agency typically only garnishes these sources in severe situations, but if you ignore your tax liability long enough, the agency may decide that the situation is severe.
Get help before the IRS seizes your assets. At TaxCure, we have curated a directory of local tax professionals. Using our search feature, you can look for a tax pro based in your area with the experience you need. Protect yourself — find a local tax pro to help you today.