The IRS has the power to levy the funds in your 401(k), IRA, or other type of retirement plan. However, IRS policy is to only levy these assets in rare situations. You can avoid the retirement account levy in several ways, but the IRS has a lot of discretion when deciding whether to levy your retirement account.
Before the Levy
The IRS will generally consider other levies before issuing a retirement account levy. Bank account levies and wage garnishments are more common. Of course, the IRS would prefer to avoid a levy altogether and to have the taxpayer enter a payment plan, but that’s not always possible.
However, some taxpayers have a large portion of their net worth tied up in their retirement accounts. They may have little to nothing in the bank, and their wages may be low enough that a wage garnishment won’t help the IRS collect the tax debt owed.
Before issuing the retirement account levy, the IRS is supposed to consider several factors:
- Whether the levy would cause the taxpayer economic hardship
- The taxpayer’s responsiveness and cooperation
- The taxpayer’s compliance history and effort to pay the tax
- If you are paying your current tax obligations
If you don’t respond to IRS notices, don’t make any effort to pay your tax debt, and aren’t paying your current taxes or filing tax returns, these actions will weigh in favor of an IRS retirement account levy.
You’ll still be required to receive several notices, including a notice informing you of your right to a collection due process hearing, before the levy is issued. Contact a tax attorney immediately if you receive one of these notices.
If there are no other assets to levy, the IRS then looks for flagrant conduct by the taxpayer. This includes contributing to the retirement account while your unpaid taxes were accruing or you were claiming an inability to pay your tax debt. If you have committed tax evasion or been assessed tax fraud penalties, this could also be flagrant conduct.
Broken promises, missing meetings with the IRS, and avoiding attempts to contact you by IRS employees may also be considered flagrant conduct. These levies are determined on a case-by-case basis, and your dependency on the retirement funds will also be considered.
The IRS would prefer not to levy retirement assets, and will give you plenty of chances to avoid the levy. However, if you don’t give them any other options, your 401(k) or IRA funds could be seized.
Talk to a tax attorney avoid retirement account levies and resolve your tax problems.
Contact The Gartzman Law Firm to speak with an Atlanta tax attorney about your case. Request your consultation by calling (770) 939-7710.