What to do when the IRS freezes your bank account

IRS freezing tactics, legal provisions and taxpayers’ defence against bank freeze

For individuals and businesses in the United States, few financial actions can be as alarming and disruptive as having a bank account frozen by the Internal Revenue Service (IRS). This aggressive but lawful collection tool is used by the IRS to recover unpaid tax debts. While it can feel sudden and overwhelming, it’s crucial to understand the legal framework, the process involved, and the options available to taxpayers.

This article provides a detailed overview of IRS bank account freezing tactics, specific legal provisions that empower the IRS to take such action and the preventive measures for U.S. taxpayers.

The IRS’s authority to freeze bank accounts

The power of the IRS to freeze or levy bank accounts stems directly from the Internal Revenue Code (IRC). Specifically, 26 U.S. Code § 6331, which grants the Secretary of the Treasury (through the IRS) the authority to collect unpaid taxes by levying upon all property and rights to property belonging to a person who neglects or refuses to pay their taxes after notice and demand.

This broad authority allows the IRS to seize various assets, including:

Bank accounts: Funds in checking, savings, and even some investment accounts.
Wages and salaries: Through wage garnishment.
Accounts receivable: For businesses.
Real estate and personal property: Typically, after other collection attempts.
Social Security benefits and retirement income: In some cases, with certain exemptions.

Notices and Warnings before Account Freeze

While the IRS has significant power, they are generally required to follow a specific due process before levying a bank account. This process is designed to provide U.S. taxpayers with ample opportunity to resolve their tax debt and avoid the levy. Ignoring these communications is a common reason taxpayers find their accounts frozen.

The typical sequence of notices includes:

Notice CP14 (Notice of Balance Due): This is often the first communication from the IRS regarding unpaid taxes. It simply notifies about an outstanding balance.
Notice CP501 (Reminder of Balance Due): A follow-up to Notice CP14, serving as a slightly more urgent reminder that a taxpayer has not yet addressed the tax debt with the IRS.
Notice CP503 (Second Reminder Notice): Second communication from the IRS, a follow-up reminder with an updated amount owed.
Notice CP504 (Notice of Intent to Levy): This is a critical notice. It officially informs a taxpayer that the IRS intends to levy their assets if the debt is not paid in full or payment arrangements are not made.
Letter 1058 or LT11 (Final Notice of Intent to Levy and Notice of Your Right to a Hearing): This is the last notice before the IRS proceeds with a levy. It explicitly outlines the taxpayer’s right to request an appeal hearing under the Collection Due Process (CDP) program, as provided by 26 U.S. Code § 6330. This notice must be sent at least 30 days prior to the levy.

It’s crucial to understand that the IRS is generally not required to notify taxpayers when it actually plans to seize money from a taxpayer’s bank account, only of its intent to levy. Once the final notice is sent and the 30-day period expires, the IRS can proceed.

When the IRS levies the bank account, they send a notice of levy (typically Form 668-A, Notice of Levy) to the bank. Upon receiving this notice:

The bank is legally obligated to freeze the funds in the account up to the amount of the tax debt. If the debt exceeds the balance, all funds will be frozen.
The Internal Revenue Code (IRC) provides for a 21-day waiting period before the bank transfers the frozen funds to the IRS. This period, often referenced in conjunction with 26 U.S. Code § 6332 (Surrender of property subject to levy), is a crucial window for taxpayers to take action.
The bank must, by law, release the funds to the IRS if no resolution or appeal has been successfully initiated after the 21-day waiting period.

It’s important to note that the levy generally only affects funds present in the account at the time the levy is received by the bank. Funds deposited after that date are typically not subject to that specific levy, though the IRS can issue successive levies if the debt remains unpaid.

Reasons for IRS Bank Account Freeze

The IRS may freeze a bank account as part of its effort to collect unpaid taxes or enforce tax compliance. This typically occurs when an individual or business owes significant back taxes or has failed to comply with tax laws. Common reasons include:

Unpaid Tax Liabilities: When a taxpayer fails to pay federal taxes owed, such as income, payroll, or business taxes, after receiving notices and demands for payment, the IRS may escalate its collection efforts by freezing bank accounts to secure funds.
Failure to File Tax Returns: Individuals or businesses that fail to file required tax returns may face account freezes as the IRS seeks to compel compliance.
Levies for Tax Debt: A bank account freeze is often a precursor to a bank levy, where the IRS seizes funds directly from the account to satisfy a tax debt.
Criminal Investigations: In cases involving suspected criminal activity, such as money laundering or unreported offshore accounts, the IRS’s Criminal Investigation Division may freeze accounts in coordination with other federal agencies.

Freezing Accounts for Tax Evasion and Fraudulent Activities

Beyond standard tax collection, the IRS also possesses the authority to freeze bank accounts when it suspects or proves tax evasion, fraud, or other criminal financial activities. In such cases, the IRS’s actions are handled by the Criminal Investigation (CI) division, and it falls under federal asset forfeiture laws, which are distinct from the civil levy process.

When the IRS suspects criminal activity, the process can be much more immediate and less reliant on a series of prior notices. The authority for these more aggressive freezes and seizures comes from:

Property Used in Violation of Internal Revenue Laws (26 U.S. Code § 7302): This broad statute allows for the forfeiture of “any property used, or intended for use, in violation of the provisions of the internal revenue laws or regulations prescribed under such laws.” If a bank account facilitates tax evasion (e.g., holding unreported income, funds from fraudulent schemes), it can be seized under this provision. This is about confiscating property connected to a crime, not just collecting an assessed tax debt.
Civil Forfeiture (18 U.S. Code § 981): This federal statute authorizes the civil forfeiture of assets involved in certain specified unlawful activities, including money laundering and financial fraud. While tax fraud alone is not explicitly listed under this statute, funds linked to tax evasion may still be subject to forfeiture if they are involved in or derived from a predicate offense such as money laundering. In civil forfeiture cases, the government is not required to obtain a criminal conviction. Instead, it must demonstrate, by a “preponderance of the evidence,” that the property is connected to illegal activity.
Criminal Forfeiture (18 U.S. Code § 982): This provision allows for criminal forfeiture, which occurs after a person has been convicted of a specified federal crime, such as certain tax-related offenses (e.g., money laundering). As part of the criminal conviction, the court can order the forfeiture of any property derived from or used to facilitate the crime.
Bank Secrecy Act (BSA) Violations (e.g., 31 U.S. Code § 5317(c)). The BSA mandates reporting of certain financial transactions. Violations like “structuring” (breaking large cash transactions into smaller ones to avoid reporting requirements) or failure to report foreign bank accounts (FBAR violations) can lead to the forfeiture of the involved funds.

Impact on U.S. Individual Taxpayers and Businesses

A frozen bank account can have severe and immediate consequences:

Loss of access to funds: This can prevent individuals from paying rent, mortgages, utilities, and other essential living expenses.
Bounced checks and overdraft fees: Leading to further financial penalties and damage to credit.
Disruption of business operations: For businesses, a frozen account can halt payroll, vendor payments, and overall operations, potentially leading to business failure.
Credit impact: While a federal tax lien (which often precedes a levy) no longer directly appears on major credit reports, a levy itself signifies significant financial distress and can indirectly impact creditworthiness.
Additional Legal Ramifications (for fraud/evasion): Beyond asset loss, cases involving tax evasion or fraud can lead to severe criminal penalties, including large fines, imprisonment, and a criminal record.

How to Respond to an IRS Bank Account Freeze

When a taxpayer’s bank account is frozen by the IRS, prompt action is critical to minimize disruption and resolve the issue. Here are the steps to take, usually in conjunction with an experienced U.S. tax lawyer:

Understand the Notice: Carefully review all IRS notices to understand the exact reason for the levy/seizure and the amount owed or the basis for the criminal investigation.
Contact the IRS Immediately: Engage with the IRS to discuss your situation.
Request a Collection Due Process (CDP) Hearing: As outlined in 26 U.S. Code § 6330, taxpayers have the right to a CDP hearing with the IRS Office of Appeals within 30 days of receiving the Final Notice of Intent to Levy (for civil tax debts).

This hearing allows taxpayers to:

Propose collection alternatives (e.g., instalment agreement, offer in compromise).
Challenge the underlying tax liability if they did not receive a Notice of Deficiency or did not have an opportunity to dispute it.
Raise spousal defences.
Argue that the levy creates economic hardship.
If a timely CDP request is made, the levy action is generally suspended until the appeal is resolved.

Appeal the Levy Decision: If the IRS denies the request to release a levy, taxpayers can appeal this decision. The IRS provides avenues for appeal, including the Collection Appeals Program (CAP). A knowledgeable U.S. tax lawyer can help you navigate this process.
Propose Collection Alternatives:
Instalment Agreement (IA): If you cannot pay the full amount immediately, you may qualify for a monthly payment plan.
Offer in Compromise (OIC): Settle the debt for less than the full amount owed if you can prove financial hardship. When an OIC is pending, levies are typically suspended.
Currently Not Collectible (CNC) Status: If you demonstrate that you cannot pay your basic, reasonable living expenses due to financial hardship, the IRS may temporarily delay collection efforts. While collection is delayed, penalties and interest continue to accrue.

Exempt Property: Certain types of property are generally exempt from IRS levy under 26 U.S. Code § 6334, including a limited amount of unemployment benefits, certain disability payments, and a minimum exemption for wages. It’s crucial to determine if any frozen funds fall under these exemptions.
Contesting Forfeiture (for fraud/evasion): If a taxpayer’s account is frozen due to suspected criminal activity, the taxpayer needs to actively contest the forfeiture in a legal proceeding. This is a highly specialized area of law.
Seek Professional Help: Navigating IRS collection actions, especially those involving suspected fraud or criminal investigation, can be incredibly complex. Consulting with a seasoned U.S. tax attorney is highly recommended. The U.S. tax lawyer can help assess your situation, understand your rights, negotiate with the IRS, and explore the best possible resolution strategies.

Pro Tax Tips: Preventing IRS Bank Account Freezes

To avoid having your bank account frozen by the IRS, consider the following proactive steps:

Always file federal tax returns by the deadline (typically April 15 for individuals) or request an extension using IRS Form 4868.
Pay taxes owed in full or set up a payment plan if you cannot pay immediately; the IRS offers online payment agreements for qualifying taxpayers.
Do not ignore IRS correspondence, but respond promptly to notices to address issues before they escalate.
Maintain organized financial and tax records to avoid errors or disputes with the IRS.
If you have foreign bank accounts, comply with reporting requirements under the Foreign Account Tax Compliance Act (FATCA) and file FinCEN Form 114 (FBAR) if applicable.
Finally, work with an experienced U.S. tax lawyer to ensure compliance with tax laws, especially for complex situations such as business taxes or large deductions. Taxlawyer.com connects Americans with experienced U.S. tax debt attorneys who act quickly to negotiate with the IRS, release bank levies, and stop enforcement actions – protecting your financial security and restoring your peace of mind.

FAQ

What should I do if my bank account is frozen by the IRS?

It is crucial to act immediately due to the 21-day holding period. First, contact your bank to confirm the levy and the exact amount frozen. Next, promptly contact the IRS using the number on the levy notice or the general IRS collection line. Be prepared to discuss your tax situation and explore resolution options such as paying the debt, setting up an instalment agreement, or requesting a Collection Due Process (CDP) hearing.

If you believe the levy is in error, the funds are exempt, or it causes severe economic hardship, gather documentation to support your claim. Given the complexity and urgency, it is highly advisable to seek assistance from a qualified U.S. tax debt attorney.

Can the IRS freeze a joint bank account if only one account holder owes taxes?

Yes, the IRS generally has the authority to levy a joint bank account even if only one of the account holders is liable for the tax debt. If a taxpayer has a right to withdraw funds from an account, the IRS can levy those funds, regardless of who originally deposited them. This means that if you share a joint account with someone who has an outstanding tax debt, the entire account balance up to the amount owed can be frozen.

The non-liable account holder may then need to prove that some or all of the funds belong exclusively to them to seek a partial release of the levy. This process can be complex and requires providing detailed documentation of income sources and account contributions.

How long does an IRS bank account freeze last?

Once the IRS issues a levy to a bank, the bank is required to freeze the funds for a 21-day holding period. During this time, the account holder cannot access the frozen funds. If the tax debt is not resolved (e.g., paid in full, an instalment agreement is approved, or the levy is successfully disputed) within these 21 days, the bank is legally obligated to transfer the frozen funds to the IRS to satisfy the tax debt.

The levy itself is generally a one-time seizure of funds present at the time the bank receives the notice. However, if the debt remains, the IRS can issue subsequent levies.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should consult a knowledgeable U.S. tax lawyer.