The bank will not send your money to the IRS that is subject to a bank levy or execution under judicial process. "Bank" includes credit unions, savings and loan associations, trust companies, and others described in IRC 408(n).
During the holding period, an IRS bank levy might be released, or the amount of the back tax owed could decrease. If the bank receives no IRS release (a 668-D form), it must send the payment to the IRS after the holding period. No additional notice is required regarding an IRS bank levy.
Owing the IRS a back tax liability is the start of the IRS collection process, so take action early to prevent penalties and interest on your IRS back taxes. One should find the best solution for your IRS back tax debt before it comes to a point that you are being penalized and the IRS activates enforcement action.
Penalties and interest arise from the Internal Revenue Service (IRS) determining that you have unpaid IRS back taxes or you have made a late filing, understand your options and possible get some penalties removed.
You will receive a notice of IRS back taxes that are owed by you. Understand what to do, base on the IRS letter you have received about your IRS back taxes.
IRS Bank Liaison:
- The holding period was created to settle disputes about ownership of bank accounts before money is sent to the IRS.
- The IRS assigns a bank liaison in each territory to settle these issues quickly.
- Sometimes ownership of the seized funds is not settled before the holding period ends. If this happens, ask the bank for more time.
Multiple Signature Authority for a Bank Account:
- An IRS levy served to your bank attaches to funds in a bank account for which the taxpayer has an unrestricted right to withdraw funds (signature authority) - even if multiple persons have signature authority for that bank account. As noted in Treasury Regulation 301.6332–1(c)(4) the unrestricted right to withdraw funds is an interest which is subject to levy.
Example:A bank is served with a notice of an IRS levy for an unpaid tax liability due from the taxpayer in the amount of $2,000. The bank holds $2,000 in a checking account in the names of a taxpayer and a third party. Although all of the deposits into the account were made by the third party, the taxpayer has an unrestricted right to withdraw the funds from the account. The bank may send the Service the entire account balance at the end of the 21 day holding period. The bank is not liable to the third party for any amount, even if the third party proves that the funds in the account did not belong to the taxpayer, because the taxpayer's unre stricted right to withdraw the funds is an interest which is subject to levy. The third party may, however, seek the return of the funds from the United States by making an administrative wrongful levy claim under IRC 6343(b) or file a suit under IRC 7426(a)(1) should the administrative claim be denied.
- A non-liable third party may claim ownership of funds in a bank account when multiple people hold signature authority for that bank account. Treat this dispute as a potential wrongful levy. A wrongful levy is a levy that improperly attaches property belonging to a third party in which the taxpayer has no rights. See IRM 22.214.171.124.2, Wrongful and Erroneous Levies, for the procedures to follow in these situations.
Provide the potentially wrongfully levied party Form 4528, Making an Administrative Wrongful Levy Claim Under Internal Revenue Code (IRC) Section 6343(b).
Amount that Must be Surrendered:
- The bank must send the amount in the taxpayer's accounts. An IRS bank levy attaches to any property or rights to property that belong to the taxpayer or on which there is a Federal tax lien, unless it is exempt. See IRC 6331, Levy and Distraint , for legal authority to levy. However, it must send no more than the amount shown on the notice of levy.
Note: By law, banks cannot immediately honor the IRS levy. See IRM 126.96.36.199, Holding Period, for guidance on the holding period after a bank levy.
- The notice of an IRS levy only reaches the amount on deposit when the IRS levy is received. Money deposited later is not surrendered, including deposits during the holding period. Another IRS levy must be served to reach this money. Also, the IRS levy only reaches deposits that have cleared and are available for the taxpayer to withdraw.
Interest on Levy Proceeds
The bank must turn over the interest earned on the account(s) during the holding period using the same method for figuring the interest it normally would. Even so, the amount paid is no more than the amount shown on the levy.
- The date the bank normally credits interest to accounts does not matter. If interest is earned, it must be paid over to the IRS.
- The IRS is the depositor.
- The money is left on deposit during the holding period.
- On the day the money is being sent, the depositor closes the account.
Bank Methods Used to Avoid Paying Interest
- Before interest was paid on an IRS levy, some banks:
- Moved the money seized by the levy from the depositor's account to another account while the depositor was notified, and
- Paid the depositor no interest while the money was in this "holding" account.
- Some banks have rules that they will not pay interest to depositors during holding periods for levies.
- Both of these methods may result in a change to the terms of the account and not treating the IRS as the depositor because of the IRS levy. These are not grounds to avoid paying interest on levy proceeds.
Income Deposited in a Bank Account
- Part of taxpayer's income is exempt from levy. See IRM 188.8.131.52 Exempt Amount . Once income is deposited in a bank, there is no exempt amount. On the other hand, unlike an IRS levy on wages and salary, a bank levy is not continuous.
- When an entire paycheck is deposited, an economic hardship may exist because all of the money is levied. If this happens, release the IRS levy in whole or in part, as appropriate, to avoid creating an economic hardship.
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You, the Taxpayer, should bear in mind however, that the IRS Offer in Compromise program or IRS Penalty Abatement program is a privilege, not a right such as bankruptcy. That being said, it is a very subjective process based on a financial formula. The IRS has the final word. The IRS Offer in Compromise (OIC) process is a very complicated drawn out process that can take upwards of nine months to a year and even longer. There are IRS guidelines, rules and protocols established by operation of law, under IRC Section 7122. However, most IRS Offer Examiners (former Revenue Officers) use the Internal Revenue Manual (IRM) as their guide.
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