FINANCE: Mistaken IRS Bank Levy Procedures
Column by Stephen Wiggs
I believe that it is common knowledge that the Internal Revenue Service is the world's most powerful debt collection agency. If you don't know that, learn it now.
The IRS has many enforced collection tools at its disposal to ensure that a tax debt owed by a taxpayer that has not obtained tax relief pays the tax debt owed. One such tool is a bank levy. The IRS has the ability to issue a bank levy on an account that bears not only the name but also the Social Security number of a person who owes the IRS a tax debt. If you've set money aside for your child's education and your Social Security number is on the account, the IRS can seize that account if you owe back taxes.
When the IRS decides to take enforced collection action via bank levy, a notice of levy is sent to the taxpayer's bank and it attaches to all accounts in the name of the taxpayer whether a sole or joint account. The bank is then legally obligated to honor the levy. Once received, the levy freezes the funds on deposit in the account. So that no one has access to those accounts, some banks actually remove the funds from the account and place them in an escrow account pending resolution. The bank will not allow anyone access to the frozen funds for 21 days from the date of receipt of the levy unless released. This 21-day holding period allows time to resolve any issues about account funds ownership and collectability. After the 21 days have elapsed, the bank will send the money plus interest, if it applies, to the IRS if the levy has not been successfully released. Therefore, if you do not want the IRS to take the money in your bank account, you will need to seek a tax relief practitioner before the 21st day since your bank received your bank levy.
Luckily for taxpayers that have timely sought tax relief before their funds were remitted to the IRS, the IRS has implemented procedures for taxpayers to request a reimbursement of the fees charged by a bank against a taxpayer for processing a bank levy when the bank levy was issued erroneously by the IRS. Reimbursements are limited to $1,000 and must be claimed within one year of being incurred. The banking fees recoverable are the fees customarily charged by the financial institution for the financial institution's compliance with the levy's instructions. Fees may also include the bad check fees or overdraft fees incurred because of the freeze on the account incurred due to the levy, and are also subject to a successful reimbursement request.
An "erroneous" levy is one that properly seeks to capture a taxpayer's property, rather than a third party's property, but nevertheless is served prematurely or otherwise in violation of an administrative procedure or law. A claim that a taxpayer has been erroneously levied requires a factual analysis and timeline to demonstrate that the IRS's issuance of the levy was a mistake.
The IRS must also make a determination that the taxpayer did not contribute to the continuation or compounding of the IRS's error. This one is difficult to prove. By not responding to the many letters that were sent prior to the levy did the taxpayer contribute to the error?
Successful reimbursement requests may be paid to taxpayers via an electronic funds transfer. Such payments may require disclosure of the taxpayer's banking information needed to complete the transfer. Therefore, the IRS can also send successful claimants their reimbursement payment via check, to avoid disclosure of the taxpayer's bank information. An experienced tax practitioner will be able to recoup funds distributed by an erroneously issued IRS bank levy.
Colorado Tax Solutions specializes in assisting taxpayers with past due tax filings as well as payment. If you've received. a notice of levy you should contact us as quickly as possible so that we might be able to save you some grief and aggravation and maybe get your money back into your bank account.