The IRS can exercise immense powers when it comes to collecting back taxes. If you owe the IRS federal taxes, the agency can garnish your assets through a procedure called a levy. When the IRS decides to levy your assets, it may seize funds from your pension and other retirement accounts. This piece covers essential information about the IRS levy and garnishment programs targeting pension funds and retirement accounts.
In Addition to Pensions, Can the IRS Levy 401(k), Self-Employed Retirement Plans, and Other Retirement Accounts?
The IRS can legally levy your 401(k) and other retirement accounts, including self-employed retirement plans. Although these accounts may be protected from creditors, the IRS can legally seize funds from your retirement savings to recover back taxes you owe. Specifically, the IRS can lawfully garnish funds in all types of retirement accounts, including:
- Company profit sharing
- Stock bonus plans
- Self-employed plans such as SEP-IRAs and Keogh plans
Why Does the IRS Levy Pensions and Retirement Accounts?
The IRS will only garnish funds from your pension and other retirement accounts if you owe back taxes. This process allows them to recoup your delinquent tax debt. Notably, the IRS usually treats this garnishment as a last resort.
Before they seize your assets or funds, the IRS first sends you notices regarding your tax balance due with a request to settle your tax debt. If you don’t respond to the IRS tax debt notices and pay your back taxes, the agency sends a Final Notice of Intent to Levy (CP504 Notice).
The IRS will then undertake an audit to determine the assets you own. If your pension funds are sufficient to pay your back taxes, the IRS can seize them. However, if they don’t have adequate equity to settle your tax debt, the seizure is exempted.
How Much of My Pension or Retirement Payment Can the IRS Garnish?
The IRS only garnishes a percentage of your pension income or retirement payment, so that you are left with something to cover basic living expenses. In most cases, the agency can garnish up to 25 percent of pension income or retirement payments until you clear your tax debt or ten years have elapsed. This applies even when the taxman is also taking 15 percent of your Social Security check to recoup back taxes you owe the IRS. However, in some jurisdictions, the court has the power to limit a garnishment if the taxpayer in question can prove the garnishment will put them in dire financial hardship.
How Much Time Do I Have After Being Notified to Appeal or Resolve My Tax Debt Before the IRS Issues a Pension or Retirement Account Levy?
You have 30 days from the date the IRS sends the Final Notice of Intent to Levy to appeal or resolve your tax debt before the agency issues a pension or retirement account levy. Taking timely action could help avoid retirement garnishment or minimize additional interest and penalty charges.
What the IRS Cannot Levy
The IRS is prohibited from levying retirement benefits based on need, which means that if you are a recipient of Supplemental Security Income through the Social Security Administration tied to your elderly status, the IRS is restricted from levying the SSI payments.
How Can I Protect My Pension and Retirement Account Funds?
Getting into a situation with the IRS due to delinquent tax debt is always a daunting experience and settling your tax debt issues with the IRS needs to be a top priority. Fortunately, you can leverage a range of tax relief options as part of the Fresh Start Initiative that the IRS provides to protect your pension and retirement funds. These options include:
- Pay Off Tax Debt: You can source funds from elsewhere and pay off the back taxes. Ideally, you can use your savings or liquidate assets to settle your tax debt in a single payment.
- IRS Payment Plan (Installment Agreement): You can also get into an agreement with the IRS that allows you to pay off your tax debt in affordable monthly installments. The IRS Payment Plan provides two installment plans; a short-term payment plan that lasts three months and a long-term installment agreement plan that lasts for between 72 to 84 months.
- Offer in Compromise: An Offer in Compromise is an agreement between you and the IRS for you to settle your tax debt for less than the total back taxes amount you owe.
- Hardship Status (“Currently Not Collectible “): You can request “Currently Not Collectible (CNC).” With this option, you are exempted from making immediate tax debt payments until your financial status improves substantially.
How Can Wiztax Help?
If you can afford to pay the full amount owed – do it as soon as possible. If you cannot, call us today at (866) 568-4593 to learn more about how we can help, or start here to take our free online evaluation.
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