Can the IRS Take Pensions for Back Taxes?

The IRS can take your pension for back taxes.

There are few limits to what the Internal Revenue Service can take from you to recover monies owed. The IRS can take pensions for back taxes, as well as other retirement accounts, Social Security benefits, bank accounts and even your home. Typically, before the IRS resorts to using the extremity of its collection powers, there must be an issue that has gone unresolved for a long time.

Time Frame

Fortunately there are statutes of limitations for the time during which the IRS can conduct an audit on your tax returns or pursue collection activities, but procedures vary from state to state. In California, there is no statute of limitations on the collection of back taxes. Usually, the IRS has three years to audit your tax return and 10 years to collect taxes.

Assets

The list of property identified as protected from collection activity, as outlined by Internal Revenue Code Section 6334, is a short one. It includes some of the basic living essentials, such as household items and furniture (valued up to $7,720); tools necessary to your trade, profession or business (valued up to $3,520); clothing and school books; undelivered mail; child support funds; and your home if you owe less than $5,000 to the IRS. Everything else is free game, but the IRS generally will not levy workers' compensation benefits, unemployment benefits or public assistance payments, although legally it can seize up to 15 percent of any federal payment.

IRS Levy

An IRS levy is a legal seizure of your assets for payment of your tax debt, which can include your pension. Prior to issuing a levy, the IRS will send you a Notice and Demand for Payment, which if ignored, will result in a Final Notice of Intent to Levy issued a minimum of 30 days before the levy. Typically, before performing a seizure, the IRS will investigate your assets for sufficient equity to pay your back taxes, otherwise seizure is prohibited.

Pensions

Your pension is not a protected asset and has value and equity. Retirement accounts subject to a potential IRS levy include Keogh plans, SEP-IRAs (for self-employment), IRAs, company profit sharing or stock bonus plans and qualified pension plans. The Internal Revenue Service manual provides IRS representatives with a three-step process to determine whether to levy the contents of your pension.

Process

First, the IRS representative should offer collection alternatives, such as seizure of other available assets or a monthly payment plan. Second, the IRS representative should introduce proof that your conduct (non-payment of taxes) was not done deliberately, and IRS instructions include seizing your pension if your behavior was deliberate. The last step is determining if you need, or will need, the pension funds for necessary living expenses.

Considerations

Perhaps the most important factor to consider is if you cannot touch your pension funds yet, neither can the IRS. If you are still employed and the withdrawal of retirement funds will not begin until you retire, reach a certain age or become disabled, the IRS cannot take your pension for back taxes.

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