A levy on a bank account happens when a bank freezes an account until a creditor is paid in full. This most commonly happens with unpaid taxes. The levied account will remain frozen until the outstanding debt is paid in full. You can avoid a levy by paying your taxes when they’re due and paying any other debt in full or at least paying the minimum amount due. We’re answering “what is a levy on a bank account” and what you’ll need to know if you find one.
How does a levy on a bank account work?
When a bank account is levied, the entire balance in the account is frozen, and any funds deposited into the account are immediately claimed by the creditor or court. That means that even if your account balance reaches zero, any additional deposits like employment checks or government support may automatically be taken toward the debt.
When the IRS levies your bank account, you get a 21-day waiting period for complying with the bank levy. The waiting period gives you time to contact the IRS and arrange to pay the tax or notify the IRS of errors. The account is still frozen, but they haven’t yet taken the funds. With an IRS levy on your bank account, funds are frozen as of the date and time the levy is received, but it does not normally affect funds you deposit after the levy date.
Who can levy your bank account?
Levied bank accounts are typically enforced by the Internal Revenue Service in the United States and are a way for it to collect unpaid taxes. While other creditors may levy a bank account for an unsecured loan, a medical bill, or a student loan, it’s rarer. It is more common for other creditors to garnish wages than to levy a bank account.
How a levy on a bank account affects your finances
A levy on a bank account doesn’t come out of the blue. Before a levy creditors usually will try several other means to collect the debt and contact you repeatedly. A creditor may take legal action to collect the debt, which could include wage garnishment, a lien on bank accounts or your property, or other collection activities.
A bank levy is more than unpaid debt. It can impact your ability to borrow money in the future. Ignoring a levy can damage a person’s credit score, making it more difficult to qualify for mortgages, student loans, or get a new credit card later.
What can be taken during a levy on a bank account?
When a levy is taken from a bank account, the creditor or agency can take the full amount of the debt, including any interest and fees. But they must leave a certain amount of money in the account to cover basic living expenses if you can prove that the levy would cause severe financial hardship. You may need to hire a specialized lawyer to help you prove financial hardship.
What happens if you ignore a levy?
Don’t ignore a bank levy. Ignoring a levy on a bank account can have serious consequences, including larger fees, additional interest, and other penalties associated with the debt. It can cause serious damage to your credit score, making it difficult to borrow funds in the future.
If the creditor is the IRS, you may be subject to additional penalties such as failure to file or failure to pay penalties, and even criminal charges. If you find yourself with a levy, the best course of action is to work to resolve it as quickly as possible.
How to avoid or remove a levy from your bank account
Avoiding a bank levy before it affects you is always the best choice. For this, you need to pay debts in full each month and pay taxes when due, including estimated tax payments. Beyond that, you have recourse even if you receive a final notice of intent and can work to pay off taxes due. Here’s what you need to know.
Review the final notice of intent
The notice of intent to levy is under Internal Revenue Code Section 6331 (d). The final notice of intent will allow you to review the tax liability and dispute the amount due if applicable. Once you receive the notice of intent, you need to pay the amount due immediately or dispute the levy.
If you do not successfully dispute the amount due or fail to make an acceptable payment arrangement with the IRS, the agency will proceed with the levy after 30 days. Without a resolution, the IRS can levy your income and bank accounts, seize your property, or your state income tax refund to pay the amount owed.
Contact the IRS
After receiving the final notice of intent, your first step is to contact the IRS and explain your situation. Ideally, pay the taxes due in full. If you don’t have the funds available, you may be able to negotiate a payment plan. If that is the case, be sure to stick to it.
To contact the IRS, call toll-free at 1-800-829-7650 or 1-800-829-3903. You may be able to resolve the issue by entering into an installment agreement, proposing an offer in compromise, or paying the tax bill.
Check whether you qualify for an offer in compromise
The IRS may allow you to settle your debt through a payment plan or other offer in compromise. To be eligible for an offer to compromise, you need to have filed all required tax returns and made all estimated payments. You need a valid extension of the current year’s return and can’t be in an open bankruptcy proceeding. If you are an employer, you need to have made tax deposits for the current and past two quarters before applying. The IRS has an offer in compromise pre-qualifier tool here.
Apply for a collection due process
Taxpayers can apply for a collection due process (CDP) hearing to contest the amount due. You have 30 days after receiving a levy notice to request a CDP hearing. This hearing gives you a chance to present evidence and dispute the debt. If the dispute is successful, the levy will be released. You can request a CDP hearing using IRS Form 12153.
Pay off the debt
For tax debt, the best way to avoid a levy is by filing returns on time and paying your taxes when due. If you need more time to file, be sure to request an extension on time.
Without debt, your bank account can’t be levied. Carefully track all debt, including credit cards, student loans, business loans, auto loans, mortgages, and any other credit lines, and make sure you’re paying at least the minimum each month. Ideally, pay off the debt in full.
Final Tips For A Levy On A Bank Account
A levy on a bank account is best avoided in the first place. For that, take steps now to pay off all existing debt and meet all tax obligations on time. Even if you have a levy on your bank account, it’s possible to get out of debt with a payment plan or other offer in compromise. With planning and budgeting, you can continue to build your financial health and credit score while avoiding unpaid debt moving forward.
How long does a levy on a bank account last?
A levy will remain on a bank account until the debt is paid back in full to the creditors that put the levy in place.
Can I open a new bank account if I have a levy?
Yes, you can open a new bank account if your bank account has a levy. A levy is not an injunction on your banking.
How do I remove a levy from my bank account?
You can remove a levy from your bank account by paying the debt in full. In addition, if you can prove that the creditor made an error or you negotiate a repayment plan, you may be able to remove a levy from your bank account.