When Can the IRS Levy or Garnish?
Does the Full Payment Rule in District Court Tax Refund Suits Include Tax, Penalties, and Interest?
Can The IRS Levy or Garnish My Bank Accounts?
If the IRS has satisfied the pre-levy requirements according to federal statutes for a tax liability assessed against you, the IRS can levy any property belonging to you, including bank accounts.
In United States v. Nat’l Bank of Commerce, 472 U.S. 713, 719-20, 105 S. Ct. 2919, 2924-2925 (1985), the Supreme Court held that the statutory language “all property and rights to property” appearing in Section 6331 “is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” Indeed, the Court has long held the view that “[s]tronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.” Glass City Bank v. United States, 326 U.S. 265, 267, 66 S. Ct. 108, 110 (1945).
In situations where a delinquent taxpayer’s property is held by a third party, the IRS serves a notice of levy upon that third party pursuant to Section 6332(a). Nat’l Bank, 417 U.S. at 720. “This notice gives the IRS the right to all property levied upon, and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government.” Id.; United States v. Whiting Pools, Inc., 462 U.S. 198, 210 n. 18, 103 S. Ct. 2309, 2316 (1983); Phelps v. United States, 421 U.S. 330, 334, 95 S. Ct. 1728 1731 (1975). Section 6332(a) of the Code requires the person in possession of, or obligated with respect to, property levied upon to surrender it to the Secretary of the Treasury upon demand. Failure to do so results in personal liability under section 6332(d)(1), which provides:
Any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the Secretary, shall be liable in his own person and estate to the United States in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes for the collection of which such levy has been made, together with costs and interest on such sum at the underpayment rate established under section 6621 from the date of such levy… .
“It is well established that a bank account is a species of property ‘subject to levy’ within the meaning of §§ 6331 and 6332.” Nat’l Bank, 472 U.S. at 721. See also Cristy v. Wells Fargo, 2012-1 U.S. Tax Cas. (CCH) P50,191, 109 A.F.T.R.2d (RIA) 888, 2012 U.S. Dist. LEXIS 13704 *7 (Dist. Ariz. 2012). “A levy against intangible property, such as a bank account, is made by service of a notice of levy.” Decker v. Richardson, 77 A.F.T.R.2d (RIA) 751, 1996 U.S. Dist. LEXIS 2056 *3-4 (D. Or. 1996) (citing United States v. Donahue Industries, Inc., 905 F.2d 1325, 1330 (9th Cir. 1990)). See also Cristy, 109 A.F.T.R.2d (RIA) 888, fn. 3. “Service of a notice of levy confers upon the United States the right to all property levied and the property comes into the constructive possession of the government upon filing of the notice of levy.” Decker, 77 A.F.T.R.2d 751 (citing United States v. Hemmen, 51 F.3d 883, 887 (9th Cir. 1995)). See also Nat’l Bank, 472 U.S. at 720 (“notice gives the IRS the right to all property levied upon . . . and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government”)
“A levy is effective upon service of the notice of levy.” Zapara v. Comm’r, 124 T.C. 223, 235 (1995) (emphasis added) (citing Resolution Trust Corporation v. Gill, 960 F.2d 336, 340 (3d Cir. 1992)); American Acceptance Corp. v. Glendora Better Builders Inc., 550 F.2d (9th Cir. 1977) (“The IRS’s regulations provide that a levy is effective upon serving notice of the levy”). See also Falck v. United States, 96 A.F.T.R.2d (RIA) 6668, 2005 U.S. Dist. LEXIS 24183 *10-12 (N.D. Ohio 2005) (“Upon service of the notice of levy, the I.R.S. steps into the shoes of the taxpayer…”); Kane v. Capital Guardian Trust, 145 F.3d 1218, 1221 (10th Cir. Kan. 1998) (“The IRS effectuates a levy upon intangible property… by the sole act of serving notice of levy upon the third party holding the property. Upon service of the notice of levy, the IRS steps into the shoes of the taxpayer and acquires ‘whatever’ rights to the property the taxpayer possessed.”). The Treasury Regulations echo this point with respect to banks, stating, “A levy on deposits held by a bank applies to those funds on deposit at the time the levy is made, up to the amount of the levy, and is effective as of the time the levy is made.” 26 C.F.R. 301.6332-3(c)(3) (emphasis added). See also 26 C.F.R. 301.6331-1(a) (emphasis added)(“For example, a levy made on a bank with respect to the account of a delinquent taxpayer is satisfied if the bank surrenders the amount of the taxpayer’s balance at the time the levy is made.”)
Subsection (c) of 26 U.S.C. § 6332 provides a special rule with respect to banks. “Any bank… shall surrender (subject to an attachment or execution under judicial process) any deposits (including interest thereon) in such bank only after 21 days after service of levy.” As explained by the House Conference Report for the 1988 act which added this subsection, this special rule “[p]ermits the Secretary to demand surrender of bank accounts only after 21 days in escrow have passed since service of the notice of levy on the accounts.” H. Rept. 100-1104, October 21, 1988, Bill Summary & Status, 100th Congress (1987-1988), H.R. 4333. Thus, while service of the notice of IRS levy under the general rule creates a “custodial relationship” between the person holding the property and the United States until the property is turned over to the government (Nat’l Bank, 417 U.S. at 720), the special rule with respect to banks under Section 6332(c) extends that custodial escrow period to a minimum of 21 days. The Treasury Regulations also emphasize the custodial escrow relationship during this period, explaining that “[n]o withdrawals may be made on levied upon deposits during the 21-day holding period, or any extension thereof.” 26 C.F.R. 301.6332-3(c)(3). This 21 day period allows the IRS and the taxpayer or another individual named on the account to resolve issues regarding ownership of the account while the money is held by the bank, a practical measure the IRS was already seeking to address by asking the banks to place such a hold on accounts with two names by the time Section 6332(c) was enacted in 1988. See IR 87-87 (IRS News Release), 1987 WL 448126.
The language “any deposits (including interest thereon)” in Section 6332(c) requires the bank to “include any interest that has accrued on the deposits prior to and during the holding period, and any extension thereof, under the terms of the bank’s agreement with its depositor” when it surrenders the levied deposits. 26 C.F.R. 301-6332-3(c)(2).
-Daniel W. Layton, the author of this post, is a former IRS trial attorney and former Federal prosecutor who was tasked with handling criminal tax prosecutions and civil litigation including tax refund suits, lien enforcement and foreclosures. As a tax attorney in private practice in Newport Beach, he uses his knowledge of IRS procedures and rules to keep the IRS in check and protect his clients’ rights. He may be contacted at (949) 301-9829.