The Internal Revenue Service has the authority to freeze a bank account to collect unpaid taxes. Although it occurs much less often, this also happens when evidence shows that an individual or business may be violating the Bank Secrecy Act. Once the IRS issues a notice of levy, a financial institution has no choice other than to comply.
Tax Collection Situations
There are three main reasons why the IRS would freeze a bank account for tax-related issues. The first is to collect unpaid taxes from a taxpayer who does not respond to collection notices demanding payment. The remaining reasons are to collect the remaining balance due when a taxpayer defaults on a payment plan or on an Offer in Compromise agreement, which allows a taxpayer with delinquent debt to pay less than the full amount owed.
Failure to Communicate
It's vital to communicate with the IRS, even if you cannot pay the full amount of your tax bill. However, even if you remain silent, the IRS cannot freeze a bank account without providing advance notice. You will first receive multiple CP14 Notices stating that you owe money on unpaid taxes. As a final collection attempt, you'll receive a "Final Notice of Intent to Levy" that gives other you 30 days to contact the IRS and either make payment arrangements or pay the entire tax bill.
Freezing Your Bank Account
The IRS can only freeze the funds in an individual or joint bank account required to pay the delinquent tax debt, and only those funds in the account on the day the levy takes effect. However, once the levy is in place, you will no longer be able to access these funds. If you take no further action, the bank will send the money to the IRS 21 days later. If there is still a balance due after this time, the IRS can issue another levy.
Bank Secrecy Act Violations
The Bank Secrecy Act of 1970 requires financial institutions to report cash deposits exceeding $10,000 and to file a suspicious activity report if a customer's actions make it appear there is money laundering, wire transfer fraud or check fraud occurring. For example, a pattern of making bank deposits for $9,910 to evade reporting requirements is a crime whether the money is from legal or illegal sources. The IRS has the authority to freeze a bank account reported as suspicious and turn the information over to the Justice Department for further investigation.
- IRS.gov: Topic 201 - The Balance Due Collection Process
- IRS.gov: 5.11.4 Bank Levies
- TaxDebtHelp.com: What is an IRS Bank Account Levy? How it Works, What to Expect
- The New York Times: Law Lets I.R.S. Seize Accounts on Suspicion, No Crime Required
- Federal Deposit Insurance Corporation: Part 353—Suspicious Activity Reports
- IRS.gov: Understanding Your CP14 Notice