When the IRS levies a bank account, it can freeze all of the funds in that account, up to the amount owed in back taxes. Unfortunately, it doesn’t just affect taxpayers’ own accounts – the IRS can also levy joint bank accounts.
If you find yourself with a frozen bank account because someone else owes the IRS money, you have options. But you need to act quickly. Call Nashville Tax Solutions at 855-627-4829 to discuss your concerns with our team of enrolled agents. We can also help if you owe the IRS and are worried about an account you own with another person being levied.
Key takeaways:
- If you own or co-own a bank account, the IRS can levy it to cover your tax debt.
- Innocent co-owners may be able to recover their lost money, but the process is difficult and time-consuming.
- Preventing a levy is easier than trying to secure a refund afterwards.
- True levy resolution prevents future bank account levies and protects innocent co-owners.
- Working with an enrolled agent can help you stop or prevent a levy.
Why the IRS Can Levy a Joint Bank Account
People often wonder why the IRS can levy a joint bank account. If you have a joint account, you may assume that you own half the funds, and the other account holder owns the other half.
Unfortunately, that is not the case. Joint accounts are owned by both account holders, meaning the IRS can levy up to 100% of the funds in the account, even if none of the money was deposited by the person who owes the tax debt.
It doesn’t matter who earned the money, made the deposits, used the account more, or if you only added your name to the account to help your child or elderly parent. If you have legal access to and control of the account, the IRS can and will seize the funds to put toward your tax debt.
This is why it’s important to be proactive about your tax debt. Hiding funds or trying to find workarounds to IRS tax collection efforts doesn’t work, but addressing the situation head-on can.
How the Bank Levy Process Works
Before the IRS levies your bank account, they take several steps first. You’ll receive early notices like CP14, CP501, and CP503, reminding you to pay and outlining penalties added to your account. If you don’t respond, the IRS will issue a Final Intent to Levy Notice with your right to a hearing, like the LT11 or Letter 1058.
You have 30 days to appeal or make payment arrangements, or the IRS will start to levy your assets.
Once the 30 days pass, the IRS can order the bank to freeze the funds in your account, up to the amount of your tax debt. Those funds are frozen for 21 days, and during this time, you do not have access to those funds. However, you do get the chance to appeal – if you can prove the levy was done in error, on exempt funds, or against the wrong person, the IRS will unfreeze the funds. If not, the bank will send the money to the IRS at the end of the 21-day period.
When Innocent Co-Owners May Get Funds Back
A bank levy is very stressful, even if you are the sole person on the account. When an innocent co-owner gets tangled up in your tax debt, though, the situation is even more stressful.
In some cases, you may be able to get an innocent co-owner’s money back if you can prove that the funds belonged to them or that the funds were exempt from levy. For example, if some of the funds were an elderly parent’s Social Security payments or a spouse’s wages, the IRS may be able to return those funds.
Proving the money belongs to the other account owner
This goes beyond calling the IRS and telling them that some/all of the money belongs to the other person on the account. You will need evidence to substantiate your claim. Be ready to show:
- Source of each deposit: Get your statements out and highlight the deposits for each party. Be ready to show the source of each deposit.
- Clear ownership history: You’ll want to establish a clear history of how the account was used and by whom. If the account was solely used by you for years until you added a spouse or family member in the last few months, that signals to the IRS that you are attempting to evade collection.
- Minimal or no commingling: It is difficult not to commingle funds in a joint account, but if you can prove that you didn’t commingle funds and all of the money was the other account holders’, the IRS may reverse the levy.
- Bank statements: Bank statements that trace the movement of funds can also solidify your case. Consider, for example, an account you share with your elderly parent so you can help them manage their money. If their funds come from cash deposits each month, the IRS may view that as you making cash deposits to hide your funds from them. But if you can show them that the deposits line up with withdrawals from a sibling’s account and that your sibling sends money every month to help out your parent, they may be more flexible.
The IRS has the legal right to seize jointly owned accounts. By extension, the burden of proof is not on the IRS to prove that it has the right to withdraw those funds. Instead, the innocent co-owner has the burden of proof to show that their funds should not be subject to levy.
Establishing that the funds were exempt
You may also be able to get funds returned if you can prove that they are exempt from levy. Exempt funds include unemployment, workers’ comp, service-related disability payments, some Social Security benefits, and court-ordered child support payments. However, if exempt funds become commingled, they may lose that protection.
Ultimately, remember that this can be an uphill battle. Even if you can demonstrate that the funds belong to an innocent party, the IRS may deny your request to release or limit the levy. Be prepared to appeal their decision to get your funds back.
Situations Where Recovery Is Unlikely
Unfortunately, there are also situations where the chances of recovery are low:
- If the funds are fully commingled and there’s no practical way to figure out what belongs to which party.
- If bank statements show that the liable taxpayer regularly used the account to make purchases or transferred money out.
- If you have a lot of cash deposits that you can’t substantiate, where they came from.
Realistic Scenarios That Trigger Disputes
There are several ways that these issues occur. Common scenarios include:
- An elderly parent adds their adult child to their account because they forget to pay their bills: The adult child owes the IRS money, and the IRS places a levy on their bank accounts. The elderly parents’ shared account is levied, and they lose their pension or other funds.
- A parent is a joint owner of their child’s bank account: When the IRS levies the bank account, the minor child loses their part-time job money and college savings.
- Divorced spouses forget to close a joint account: Divorced spouses don’t close a joint account, or one spouse continues using it as a sole account for the sake of convenience. The other spouse gets their account levied, and the uninvolved ex-spouse loses everything.
- Shared account for a married couple’s bills gets levied: A married individual has tax debt from when they were single, or they file taxes separately. Their shared bill account gets levied.
Preventing Levies on Joint Accounts in the Future
Once you’ve resolved this issue, you’ll want to take any steps necessary to avoid it happening again in the future.
- Avoid unnecessary joint accounts; if you want to pay bills for an elderly parent, consider a power of attorney designation or authorized signatory role to protect their assets from your tax concerns.
- Keep records: If a joint account is necessary, maintain thorough financial records showing deposits and withdrawals so you can prove how much belongs to each party, but keep in mind that this isn’t foolproof. The IRS may still be able to seize the funds.
- Never ignore IRS notices: Bank account levies almost never happen without notice, and by taking action early, you can prevent a levy and come up with more practical payment arrangements.
Resolution Tools to Stop or Reverse Levies
Proactively stopping a levy is generally far more effective than fighting for a refund after the fact. Once you’ve received notice that the IRS is going to levy your bank account, you can look into these payment options:
- Installment agreement: By committing to monthly payments until the collection window closes on your tax debt, you can pay off what you owe without risking further levies.
- Offer in compromise: If payment in full is truly impossible, you may qualify for an offer in compromise. This allows you to settle your tax debt for less, based on what you can reasonably afford.
- Currently not collectible status: If you have financial hardship that prevents you from making payments, the IRS may temporarily halt collection actions. They will occasionally check your financial status to see when they can resume their collection efforts.
If the IRS has already frozen your bank account, you need to use the 21-day window to appeal their decision. This may mean requesting an equivalent hearing if it’s been less than a year after you received the Final Levy Notice or using the Collection Appeals Program (CAP) to appeal.
Once the funds have been seized by the IRS, you’ll need to raise an innocent owner defense. This is far more time-consuming than the other options, which is why you should take action sooner rather than later.
Special Consideration: Levies That Take Needed Funds
You may also be granted relief if you can prove that a levy on your bank account is causing significant financial hardship. Your situation may qualify if the levy leaves you unable to meet your basic and reasonable living expenses, but you’ll have to provide documentation to back up your claim.
Note that if you go this route, the unpaid taxes do not go away. Even if the IRS grants you relief from the bank account levy, they will still expect you to take steps to pay off the balance in other ways.
When Legal Help Is Essential
Whenever your (or others’) money is at stake, and a levy is imminent, we always recommend talking to a tax professional. This is especially important if the funds belong to a vulnerable parent, child, or uninvolved spouse – your tax situation could leave them without the funds they need. Consider talking to an enrolled agent for assistance.
Professional advocacy is key to stopping levies, addressing your tax debt, and finding solutions that fit your finances. Call Nashville Tax Solutions at 855-627-4829 or contact us online to discuss your next steps now.
You may be able to get their money back by appealing the IRS’s decision and proving that the funds they took were not yours. Be prepared to show extensive financial documentation that traces the deposits into the account.
Yes, but only if you do so during the 21-day freeze. Work quickly to gather documents that prove ownership and usage of funds, and keep in mind that by default, the IRS sees all the funds in joint accounts as 100% owned by any person on the account.
Filing separately protects your spouse from your tax liability (unless you live in a community property state), but it does not protect their funds if you share a joint account. If you co-own a bank account and you have tax debt, that account is subject to levy.
These cases are notoriously complex and slow-moving, which is why we recommend addressing this situation proactively. You could easily be waiting for months, and during that time, you do not have access to the money to meet other financial obligations.
If a joint account isn’t necessary, it may be wise to take your name off of it. You can still support your aging parent or minor child with power of attorney designations or other arrangements.