Can The IRS Freeze Your Bank Account?

If you’ve received a letter from the Internal Revenue Service (IRS) about a past-due debt and you’re wondering whether they can actually freeze your account, the answer is yes. The IRS can freeze your bank account if you fail to pay your taxes, which can have far-reaching and serious consequences. When the IRS freezes a bank account, they essentially lock it so no funds can be taken out until the taxpayer pays their tax debt. This could include wages, Social Security payments, or other money owed to you. But don’t worry. The IRS is usually reluctant to take such drastic action and will normally only do so after multiple attempts have been made to contact the taxpayer and collect any unpaid taxes. In most cases, you’ll receive plenty of notice before it gets to this point. 

Consequences of not paying taxes

The primary consequence of not paying taxes is owing an ever-increasing debt to the IRS. The IRS has an arsenal of collection methods at its disposal, including liens on property, garnishing wages or Social Security benefits, levying or freezing bank accounts, and imprisonment for willful failure to pay taxes. 

As part of their efforts to collect back taxes, the IRS might freeze your bank account as a way of forcing you into compliance with federal income tax laws. In addition to freezing accounts, they may issue liens against it to recoup owed money. 

Why would the IRS freeze your bank account?

The IRS will notify you well in advance of freezing your bank account, which they could do under the circumstances outlined below.

1. Ignored tax collection notices

Taxes owed are the most frequent cause for IRS freezing of accounts. This is when an individual owes back taxes, has failed to pay estimated taxes due, or has not paid estimated self-employment taxes. 

2. Bank Secrecy Act violations

Bank Secrecy Act violations refer to activities such as hiding assets and income from taxes owed by transferring funds through foreign banks and financial institutions to avoid detection by the IRS. Should the IRS discover accounts believed to be involved in Bank Secrecy violation activities, they may freeze those accounts until further investigation has taken place. 

3. Defaulted payment plan

People who agree to payment plans with the IRS may find themselves subject to an account freeze should they fail to adhere to the plan by missing payments or filing late returns. To avoid this situation it is important for people who have set up repayment plans with the IRS to keep up with their obligations so their accounts remain unfrozen.

4. Suspicious activity

Tax fraud and other criminal activity related to taxes is taken seriously. Suspicious activities include filing multiple tax returns using the same Social Security number, filing false documents with the IRS, and making false statements during a tax audit. All of these activities can result in an account freeze from the IRS. 

How can I get the IRS to unfreeze my bank account?

If the IRS freezes your bank account, it can be challenging to get the situation resolved. The first step is to contact the IRS. You will either need to pay the balance in full or set up a payment plan. 

1. Make a payment

Pay your taxes in full, if possible. With your account frozen, getting together the assets from another source can be challenging. But paying the debt is the best way to unfreeze your accounts without incurring additional fees and penalties. If you can’t afford to pay the debt in full, explain this to the IRS. Let them know you are willing to make a payment toward the debt. In certain circumstances, the IRS will unfreeze an account if one or more payments have been made toward settling a tax debt. 

The IRS may also give some consideration to those who can demonstrate financial hardship resulting from extenuating circumstances such as loss of employment or medical bills. Having proof of these hardships can go a long way in convincing the agency to unfreeze your account if you make at least one large payment toward your debt. If this is approved, then you may be eligible for further assistance from the agency by having some other fees waived or reduced when making future payments.

2. Set up a payment plan

The IRS will usually require that you fill out and submit paperwork regarding the account freeze. This includes documents such as Form 9465, Installment Agreement Request, or Form 433-F Collection Information Statement. You may need to provide financial statements, including bank statements and pay stubs so the IRS can review your ability to pay any outstanding taxes owed. Depending on your circumstances, you may also need to complete a collection information statement for business/self-employed Individuals or a collection information statement for wage earners and self-employed individuals. 

Once all of the necessary paperwork is completed and submitted, the IRS will typically respond within 30 days with an update about whether your request for an installment agreement has been approved. If it’s accepted, the IRS will lift its hold on your bank account. But if your request is denied, a representative from the agency will contact you with instructions on how to appeal the denial or negotiate an alternative payment plan. 

It’s important that you keep up with all scheduled payments  to regain control of your finances, or you risk further action from the IRS.

What you can do to avoid the IRS freezing your bank account

Not only is it stressful to have your account frozen, but this action typically results in costly fees and penalties getting tacked onto the amount already owed. You’ll want to take all measures to avoid it getting to this point. 

1. File your taxes on time

Stay current on your tax filings and payments. Even if you cannot fully pay off what you owe right away, there are options available such as making payment plans with the IRS that can provide relief from penalties or interest accruing on past due balances while still getting caught up on what is owed.

Taxes are typically due by April 15, but you may be able to request a filing extension. The IRS provides helpful resources online regarding filing requirements and deadlines that can help guide you through this process and assist you with meeting your obligations as a taxpayer.

2. Contact the IRS

If you owe taxes and can’t afford to pay, call the IRS to discuss repayment plans and other options for settling the debt. 

Be honest with the information provided — lying or intentionally providing false information could land taxpayers in further legal trouble with the agency. 

The most likely solution when dealing with taxation debt is reaching an installment agreement. The IRS offers both short-term and long-term monthly payment plans. To enter a payment plan, you’ll need to prove you can’t afford the debt. Interest and late fees can continue to add up while you’re making payments. 

You may also want to ask about the Offer In Compromise (OIC) program. This program allows some taxpayers eligible for tax relief to reduce the amount of money owed on back taxes if they meet certain criteria like inability to pay or economic hardship resulting from serious illness or similar events out of their control. The OIC program also helps reduce associated interests and penalties.  

3. Respond to notices

If you have received a letter from the IRS regarding a debt that you owe, contact the agency as soon as possible. Ignoring the letter will not make the debt go away and can lead to serious consequences. The IRS may freeze your bank account if they believe you are not making attempts to pay off the debt or if they believe you are attempting to commit tax fraud. This means that any money that is in your bank account will be unavailable to you while the freeze is in effect, making it difficult to pay bills or access important funds.

Tackle tax issues head-on 

One of the most unpleasant events any taxpayer can experience is having their bank account frozen. In certain cases, if you owe money to the government and fail to pay your taxes, the IRS may take this drastic measure as a way to recoup what you owe. Although a bank levy is a nightmare, learning how to deal with a frozen bank account can help taxpayers avoid serious headaches and get back on sound financial footing. If your account is frozen, don’t panic and take steps to resolve the issue directly with the IRS.

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