Can your IRA or Qualified Retirement Savings be Levyed?
What is a lien or a levy?
When the IRS sends a notice of lien, they are announcing their intent to claim your assets due to a tax debt. This declaration is intended to protect their interest against other potential creditors who may also make a claim. At this stage, a taxpayer receives a notice to either pay the tax owed immediately or establish a payment plan. But what happens if the debt remains unpaid? Typically, the IRS allows plenty of time to resolve the issue. If that doesn’t work, they may send another letter called a CP504 Notice of Intent to Levy. A levy is different from a lien; it means the IRS intends to seize property.
What can be seized?
- The IRS can seize or take control of various types of personal and real property. They can also seize tax refunds, wages, bank accounts, and Social Security benefits. For example:
- Wages, real estate commissions, and other income.
- Bank accounts, including checking and savings accounts.
- Business assets.
- Personal assets, such as your car, boat, vacation home, and primary residence.
- Social Security benefits.
- Brokerage accounts.
The IRS’s authority to take these actions comes from §6331 of the Internal Revenue Code. So, what about an IRA, a 401(k), or another Qualified Retirement Plan? The answer, unfortunately, is yes. The IRS can seize a taxpayer’s retirement accounts to satisfy a tax debt. In doing so, as with an IRA, the amount seized is treated as a distribution, which means the taxpayer will owe tax on that amount. For example, if the IRS seizes an IRA to cover $8,000 of tax debt, they might take $10,000. This includes the $8,000 tax debt and an additional $2,000 in taxes (20% withholding).
What can be done?
There are limits to what can be seized and procedures we can use to stop a seizure, allowing the account to be reviewed and an opportunity to settle the debt without such drastic measures. The key is to respond quickly to IRS notices.
We can work with the IRS on your behalf to stop asset seizures and negotiate a solution. Call us to discuss any letters or issues you are having with the IRS?