When a tax debtor fails to meet his or her tax obligations, the Internal Revenue Service will typically initiate collection proceedings that begin in the form of instituting a levy on the tax debtor’s assets. A levy on the tax debtor’s assets is a effective way to ensure that those assets will be available to the IRS to be used to satisfy the outstanding tax obligation. However, there are a number of procedures that must be followed prior to the actual satisfaction of the outstanding tax obligation using these funds.
As an initial matter, there is a 21-day holding period during which the bank must wait before it can send payment to the IRS. Following these 21 calendar days, the bank must then turn over the taxpayer funds on the following day in satisfaction of the levy. Internal Revenue Service, Internal Revenue Manual 22.214.171.124 (07-26-2002), Holding Period, available at https://www.irs.gov/irm/part5/irm_05-011-004.html. While the depositor can agree to waive this holding period, this is probably not a common occurrence, and assuming the bank does not receive a notice from the IRS releasing the levy, the bank must send the funds following the end of the holding period, and no additional notice from the IRS is required. The bank must send to the IRS the entire contents of the bank account up to the total amount owed the IRS, but no more than the amount owed the IRS.
Bank levies are equally effective with respect to joint accounts or accounts where the tax debtor in question has the authority to withdraw from that account. Thus, even if the funds in the account were deposited into that account by a third party, the IRS may levy on those assets and utilize them in satisfaction of the tax debtor’s federal tax liability as long as the tax debtor has the right to withdraw those funds.
Banks will typically have policies regarding levies that relate to depositor interest, and will also charge fees when levies are enforced on their accounts. For example, banks may require that no interest accrue on an account that is the subject of a levy during the holding period, and may charge fees for processing levies. That said, the bank is not entitled to reduce the levy proceeds in order to collect the fee.
To learn more about bank levies imposed by the IRS on tax debtor’s financial accounts, consult an experienced tax professional.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.