The IRS can levy the funds in your retirement accounts, including 401(K) plans, IRAs, profit sharing plans, SEP-IRAs, and Keogh plans. Many taxpayers may be unaware that the IRS has this authority because retirement plans are often protected from creditors. However, the IRS has powers that exceed those of most creditors, including levying the funds in your retirement account.
The IRS uses a three part analysis before levying a retirement account. There is a bit more caution used by the IRS in these cases when compared to bank account or wage levies. These accounts provide for a taxpayer’s future welfare, and the IRS will only levy these funds if certain requirements are met.
IRS Procedures for Levying a Retirement Account
Internal Revenue Manual 18.104.22.168 provides the procedures for levying a taxpayer’s retirement account. Before considering the analytical framework used by the IRS, it is important to note that the IRS only has rights to the funds that the taxpayer currently has rights to. If the taxpayer is still working or has not reached retirement age, then they may not have a right to withdraw the funds immediately. The IRS would inherit the taxpayer’s rights, effectively stepping into the shoes of the taxpayer.
The first thing the IRS will consider before levying a retirement account is whether the taxpayer has other assets that can satisfy their tax obligations. If the IRS can instead levy a taxpayer’s bank account or wages, it would prefer to do so, rather than levy a retirement account. If a taxpayer is willing to enter into an installment agreement to pay off the tax debt, this is also preferable to a retirement account levy from the point of view of the IRS. Although if the retirement account is very large then the IRS may take a different view.
The second step involves determining whether or not the taxpayer engaged in “flagrant” conduct. This determination is made on a case-by-case basis. If a taxpayer did not engage in flagrant conduct, the IRS will generally not levy retirement account assets.
Examples of flagrant conduct include:
- voluntarily depositing funds into a retirement account when the taxpayer knew unpaid taxes were accruing
- taxpayers convicted of tax evasion for the tax debt
- taxpayers assessed tax fraud penalties for the tax debt
- taxpayers who accumulate unpaid income tax periods over multiple tax periods who do not adjust their withholding or make estimated tax payments
- taxpayers who have placed other assets beyond the reach of the government, such as by transferring funds to offshore bank accounts or transferring them to other people
There are certain extenuating circumstances that the IRS may consider as mitigating the flagrant conduct, such as identity theft, illness, loss of employment, or loss of a family member.
The third and final step of the process is to determine whether the taxpayer will need the funds in the retirement account for necessary living expenses. The IRS will determine necessary living expenses and calculate the taxpayer’s life expectancy in order to make this determination. If taxpayers need the funds in the retirement account for necessary living expenses, or will need them in the near future, the IRS may not levy the retirement account funds.
These steps involve a lot of fact-intensive inquiries which leave room for interpretation and argument. If you think the IRS is attempting an improper levy on your retirement account, consult with a tax attorney immediately.