The IRS can levy money in your bank account and, in some circumstances, money in a retirement account to collect unpaid federal taxes. A bank generally holds levied funds for 21 days before sending them to the IRS. That short period can be critical. Once money has actually been transferred to the IRS, especially retirement savings, getting it back can be much harder.

If you received an IRS levy notice, or your bank has already frozen your account, do not assume there is nothing you can do. There may be ways to stop or release a levy, address a financial hardship, appeal collection action, or set up another resolution. At Tomes Law Firm, our tax resolution team looks at the tax debt, the IRS collection history, the taxpayer’s finances, and the available options. This article explains what can happen and why acting quickly matters.

What Happens When the IRS Levies a Bank Account?

The IRS does not usually take money from a bank account the instant it issues a levy. When a bank receives an IRS levy, it generally freezes the funds in the account that are subject to the levy and holds them for 21 days before sending them to the IRS.

That 21-day holding period is important. It may give the taxpayer or the taxpayer’s representative time to contact the IRS, determine why the levy occurred, and see whether there is a basis to have it released before the bank sends the money.

A bank levy is generally a one-time levy on the money available when the levy is received. It is different from a wage levy, which can continue taking part of each paycheck until the levy is released or the tax debt is otherwise resolved.

Can the IRS Take Money From a Retirement Account?

Yes. Retirement accounts are not automatically protected from an IRS levy. The IRS identifies retirement accounts as property that may be subject to levy.

Whether the IRS can reach a particular retirement account can depend on the type of account, the taxpayer’s present right to receive the money, and the terms of the plan. IRAs and employer-sponsored plans such as 401(k)s do not always work the same way.

The loss can be especially painful because retirement money may represent decades of savings. A levy can also create income-tax consequences when retirement funds are distributed. However, an early distribution made because of an IRS levy may qualify for an exception to the normal 10% additional tax on early distributions.

Donna Lost More Than $100,000 of Her Retirement Savings

We have seen what happens when someone waits too long. One woman who came to our firm — I will call her Donna — had accumulated more than $100,000 in retirement savings.

Donna’s husband operated an LLC and did not pay enough federal income tax on the income he earned from the business. Donna and her husband filed their income tax returns married filing jointly. As a result, the unpaid joint income tax was not simply her husband’s tax problem. The IRS could pursue Donna for the joint tax liability as well.

The IRS eventually reached Donna’s retirement savings. By the time she came to us, the retirement money had already been taken. It was too late for us to stop the levy and recover those funds. More than $100,000 that Donna expected to have available for retirement was gone.

That is why we tell clients not to wait until the IRS actually takes the money before asking for help. Appeal rights, collection alternatives, hardship arguments, innocent spouse relief, or other options may need to be investigated before the money is gone.

But It Was My Spouse’s Income. Why Can the IRS Take My Money?

When spouses file a federal income tax return married filing jointly, both spouses are generally jointly and individually responsible for the tax shown on the return, as well as certain additional tax, penalties, and interest. That can allow the IRS to collect a joint tax debt from either spouse even if most of the unpaid tax arose from one spouse’s business or income.

There are circumstances in which a spouse may qualify for innocent spouse relief or another form of relief from joint liability. But relief is not automatic. The facts matter, and deadlines can apply. If one spouse has created a serious tax problem, it is important to review the joint liability before IRS collection reaches the other spouse’s assets.

What Notices Come Before an IRS Levy?

The IRS generally must follow collection procedures before it levies property. Taxpayers may receive balance-due notices and, before many levies, a Final Notice of Intent to Levy and Notice of Your Right to a Hearing.

That final notice should not be ignored. A timely Collection Due Process hearing request can provide important appeal rights and may stop levy action while the hearing is pending, subject to applicable rules and exceptions.

One of the biggest mistakes we see is treating IRS mail as something that can wait. A notice that seems like another collection letter may contain a deadline that changes the taxpayer’s rights.

Can an IRS Levy Be Released?

The IRS may release a levy in several situations. Examples can include when the tax has been paid, the collection period has expired, releasing the levy will help collect the tax, the taxpayer enters into a qualifying installment agreement, or the levy is creating an immediate economic hardship.

A levy release does not necessarily erase the tax debt. It means the particular collection action is released. The underlying tax problem still needs to be resolved.

Can I Get the Money Back After the IRS Takes It?

Sometimes there are procedures for returning levied property or levy proceeds, but getting a levy released before the money is transferred is very different from trying to recover money after the IRS has already received it. The legal basis, facts, and timing matter.

Donna’s case shows why speed matters. Waiting until a retirement account has been emptied can leave far fewer options than addressing the collection problem when the levy notice first arrives.

What Should I Do If My Bank Account Has Been Levied?

Do not wait. Find out the tax periods involved, how much the IRS says is owed, what notices were sent, whether appeal rights remain, and when the bank intends to send the money to the IRS. A tax professional can also review whether the levy creates an economic hardship and what collection alternatives may be available.

If retirement funds are threatened, the stakes can be even higher. Before withdrawing money, moving assets, or making a large payment to the IRS, understand how the proposed action affects the overall tax resolution.

Talk to a New Jersey Tax Resolution Attorney Before the Money Is Gone

An IRS levy can turn a tax problem into an immediate financial crisis. But a levy notice does not always mean the outcome is already decided.

Tomes Law Firm represents New Jersey individuals and business owners with IRS collection problems, including bank levies, threatened retirement levies, installment agreements, hardship cases, offers in compromise, and other tax resolution matters. The earlier we can review the problem, the more opportunity we may have to protect your options.

If you received an IRS levy notice or your bank has frozen your account, contact Tomes Law Firm promptly at 732-333-0681 or 833-4IRS-TAX or visit us online at tomelaw.com for a free confidential strategy session. Do not wait for the 21-day bank holding period to run out.

Frequently Asked Questions

How long does a bank hold money after an IRS levy?

Generally, 21 days before sending the levied funds to the IRS.

Can the IRS levy my 401(k) or IRA?

In some circumstances, yes. Retirement accounts are not automatically exempt from federal tax collection, although the rules depend on the account and the taxpayer’s rights to the funds.

Can the IRS take my money for taxes caused by my spouse?

If you filed a joint return, both spouses are generally responsible for the joint tax liability. Possible innocent spouse or other relief should be evaluated based on the specific facts.

Does an IRS levy make the tax debt go away?

No. A levy is a collection method. If the levy does not satisfy the entire balance, the remaining tax debt can still be collected.

Should I call the IRS myself after a levy?

You can, but before agreeing to a payment or giving detailed financial information, it can be useful to understand your collection options and deadlines, especially when a large bank balance or retirement account is at risk.

Primary IRS Resources

IRS – Information About Bank Levies: https://www.irs.gov/businesses/small-businesses-self-employed/information-about-bank-levies

IRS – What Is a Levy?: https://www.irs.gov/businesses/small-businesses-self-employed/what-is-a-levy

IRS – How Do I Get a Levy Released?: https://www.irs.gov/businesses/small-businesses-self-employed/how-do-i-get-a-levy-released

IRS – Levy: https://www.irs.gov/businesses/small-businesses-self-employed/levy

IRS Publication 594 – The IRS Collection Process: https://www.irs.gov/pub/irs-pdf/p594.pdfIRS – Exceptions to Tax on Early Distributions: https://www.irs.gov/retirement-plans/