Many people who owe taxes to the IRS are terrified that the IRS will swoop in and take their retirement nest egg or retirement income, thereby leaving them destitute for their golden years. Can the IRS really do that? Generally, such assets are “off limits” to creditors thanks to federal protections. But they are not off limits to the IRS. This fact is both surprising and upsetting to most of my clients. I imagine such news triggers their internal compass as being “not fair.” Saving for retirement in America is hard enough. Many of my clients have been working their whole life, are at or nearing retirement age, recently found themselves in tax trouble, and now the IRS wants to seize their sacrosanct nest egg?! The good news is that there are actions that can be taken to prevent the IRS from destroying your retirement in the vast majority of cases. I will explain these actions below after first providing a basic overview.
An Overview of the IRS’s Ability to Take Your Property
The IRS cannot simply show up out of the blue and take your property if you owe it money. It must first satisfy a few procedural steps. The IRS must have a lien against you. This can happen through a “statutory” or “silent” lien, which goes into effect after a taxpayer fails to respond or pay after receipt of a balance due notice. Often, the IRS will also file a lien as a public record, through a Notice of Federal Tax Lien. This filing is a public notification, filed with the designated state and local jurisdictions, and it establishes the IRS’s claim to your property (and future rights to property) and its priority among competing creditors.
Second, (with a few exceptions) the IRS must send you a Final Notice of Intent to Levy and allow the 30-day appeal deadline to lapse.
With those procedural formalities out of the way, the IRS now has the ability to levy and seize your property. But what exactly does that mean, and what are its limits? Congress, through the Tax Code, has empowered the IRS to collect any delinquent tax “by levy upon all property and rights to property” of a taxpayer. The statute carves out an exception for very limited types of property listed in another statute, but otherwise, there are no restrictions to the IRS’s levy powers, as “no property or rights to property shall be exempt from levy.” Relevant to this article is that general retirement benefits and pensions are not on the list of exempt property. That means, by law, such property is “fair game” for the IRS to levy (take).
So the IRS Can Take My Retirement Accounts or Income, but Will It?
Before diving in, I must make an important distinction: the rules are different concerning a levy of retirement income and a levy of the retirement fund itself.
Retirement Income
IRS collection officers are given an express grant of authority to levy retirement, benefit, and social security income. This applies if you are already receiving (or have the legal right to receive) the income from one of these sources. A levy on such income attaches to all property in which the taxpayer has a “fixed and determinable right”—meaning that a levy on such income here attaches to more than just one payment, it reaches future payments as well.
How Can I Prevent a Levy on My Retirement Income?
The best way to minimize the impact from a levy is to prevent it before it begins. A Revenue Officer (tax collector) is instructed to make certain considerations before levying any taxpayer asset. The first is the taxpayer’s financial condition: Will a levy of this asset create a financial hardship for the taxpayer? If the IRS takes this source of income, will the taxpayer still be able to meet their basic living requirements as defined by the IRS?
If you are facing collections from the IRS, and it is threatening to levy a source of retirement income, the case you present in response should focus on these considerations. Another option is to propose a suitable resolution alternative—i.e., an installment agreement or Offer in Compromise. A third option, as a last resort, is to file an appeal through the IRS’s Collection Appeal Program. There are also certain times when you could postpone, prevent, or reduce the chances of a levy by filing a Request for a Collection Due Process Hearing.
401k and IRA Retirement Accounts
IRS collection officers are given authority to levy funds held in pension and retirement plans. There are many types of retirement vehicles swept into this definition, which includes 401Ks, Qualified Pensions, IRAs, and Self-Employed Plans. Before doing so, however, IRS collection officers are to complete a three-step analysis. The analysis requires an affirmative answer at each step before it is appropriate to levy a taxpayer’s Retirement Funds.
Three-Step Analysis for Levying Retirement Funds
- Are there non-retirement assets available or a feasible payment agreement? If so, levy these assets first.
- Was the taxpayer’s conduct “flagrant?” This includes frivolous arguments, continued contributions to retirement accounts despite a tax debt, and evasion-related behaviors.
- Is the retirement fund necessary now or soon to meet basic living expenses? If so, it may be exempt from levy.
The IRS can only levy a retirement account if the taxpayer has a present right to access those funds. For taxpayers without vested rights to the account, the IRS cannot seize it.
How to Protect Yourself
The best solution is to enter into a payment arrangement or another formal agreement with the IRS. Once an installment agreement or Offer in Compromise is in place, the IRS cannot proceed with levies against a taxpayer’s retirement assets. If you have funds in a retirement account or are receiving retirement income and the IRS has issued a Final Notice of Intent to Levy, consider contacting a tax professional immediately.
There are statutory protections that a skilled tax attorney can raise to protect your retirement. To explore options, contact Fortress Financial Services for guidance and expertise on managing your IRS challenges.
