The IRS Froze Your Bank Account: Using the 21-Day Hold

You tried to pay for groceries and the card was declined. You logged in and saw a hold on your balance, or a zero where your money used to be. Then the bank's letter arrived: a Notice of Levy from the Internal Revenue Service.

Here is the most important thing to know: the money has not gone to the IRS yet. Under Section 6332(c) of the Internal Revenue Code, a bank must wait 21 days after a levy is served before it surrenders the funds. That window exists so problems can be fixed before the money moves. Use it.

How a bank levy actually works

The IRS serves a Notice of Levy (usually Form 668-A) on your bank. According to the Internal Revenue Manual, the bank freezes the money in your accounts up to the amount on the levy, waits 21 calendar days, and on the next business day sends the funds to the IRS unless the levy has been released. No additional notice to you is required before the money goes.

A few rules surprise people:

• The levy is a snapshot. It reaches only money in the account when the levy was received. Deposits made afterward, including during the 21 days, are not caught by that levy. The IRS would need to serve a new one.
• It is not continuous. Unlike a wage levy, a bank levy does not keep taking money week after week.
• Joint accounts get frozen too. If you can withdraw from an account without restriction, the levy can reach it, even if most of the money came from someone else.
• Paychecks lose their protection once deposited. Part of your wages is exempt from a wage levy, but the Internal Revenue Manual says that once income is deposited in a bank, there is no exempt amount. That is why a bank levy can take an entire paycheck, and why hardship release matters so much.
• The bank cannot take its levy fee out of the IRS's share. It may charge you a fee, but it must collect that fee from your other money, not reduce what goes to the IRS.

The legal grounds for getting the levy released

Section 6343(a)(1) requires the IRS to release a levy in certain situations. The ones that come up most often with bank levies are:

• Economic hardship. The levy is creating an economic hardship due to your financial condition. Treasury Regulation 301.6343-1(b)(4) explains that this applies when the levy would leave an individual unable to pay reasonable basic living expenses, such as housing, utilities, food, medical costs and transportation.
• Installment agreement. You have entered into an installment agreement under Section 6159, unless the agreement provides otherwise.
• Release will help collection. Releasing the levy will make it easier to collect the tax.
• The liability is paid or no longer collectible. The debt has been satisfied, or the collection period has expired.

The hardship ground, under the regulation, applies to individual taxpayers. A business account levy is a different conversation. See levies on business accounts.

What to do during the 21 days, step by step

1. Read the levy and find the IRS contact. The notice your bank sends shows the amount and the IRS office or phone number. Write down the date the bank received the levy and count 21 days forward. That is your real deadline.
2. Check whether you missed a hearing notice. Before most levies, the IRS must send a final notice with Collection Due Process rights, such as an LT11, Letter 1058 or CP90. If one arrived less than 30 days ago, a written hearing request may still be timely. If it is past 30 days, you may still be able to request an equivalent hearing within one year. See the final notice guide.
3. Build your hardship case. Gather proof of income and necessary monthly expenses: rent or mortgage, utilities, car payment and insurance, medical bills, child care, and current tax payments. The IRS will usually want a financial statement such as Form 433-A or Form 433-F. Be complete and accurate. The regulation requires good faith, and inflating expenses or hiding assets is a reason to deny release.
4. Call the IRS and ask for a release. Explain why the levy should be released and which ground applies. Under the regulation, you can request a release in writing or by phone, and you should give your name, address, taxpayer identification number, a description of what was levied, the tax periods, and the reason for release.
5. Propose a resolution. The IRS is far more willing to release a levy when the case is moving toward a resolution: a payment plan, a currently-not-collectible status, or a plan to file missing returns. Section 6343(a)(1)(C) requires release once you enter into an installment agreement, unless the agreement says otherwise.
6. If the collection employee says no, ask for a manager. Then consider the Collection Appeals Program (Form 9423), which can be used for levies whether or not you have Collection Due Process rights.
7. If time is almost out, contact the Taxpayer Advocate Service. Use Form 911. TAS can help when an IRS action is causing financial hardship and normal channels have not resolved it.
8. Confirm the release reached the bank. A release must actually be delivered to the bank before the 21 days end. Ask the IRS how and when it was sent, and call the bank to confirm.

If the money belongs to someone else

If the frozen account belongs to a parent, a child or a business partner who does not owe the tax, that person may be able to file an administrative wrongful levy claim under Section 6343(b). IRS Publication 4528 explains the process. Under Sections 6343(b) and 6532(c), the claim for return of money and any lawsuit under Section 7426 are generally limited to two years from the date of the levy. The account holder should act during the 21-day hold, while the money is still at the bank.

If the bank already sent the money

It is not always over. Section 6343(d) allows the IRS to return levied property in some cases, such as when the levy was premature or not in accordance with IRS procedures, when you have entered into an installment agreement (unless the agreement provides otherwise), or when return would help collection. If the IRS caused the levy by its own error, such as not posting your payment on time, you may be able to recover bank fees with Form 8546 within one year of the charge, up to $1,000, according to the Internal Revenue Manual.

What not to do

• Do not wait out the 21 days hoping it resolves itself. If no release reaches the bank, the money goes to the IRS.
• Do not move money into a relative's account to hide it. It can create new problems, including for the relative.
• Do not exaggerate your expenses. A hardship release depends on good faith.
• Do not ignore the next notice. A bank levy is often a sign that a wage levy or more levies are coming. See what to do about a wage levy.

Getting help before day 21

A bank levy is one of the most time-sensitive problems in tax collection, because the window is short and fixed by law. If your account is frozen, every day counts. The Law Offices of Darrin T. Mish, P.A., in Tampa, focuses on IRS collection problems, including levy releases. You can reach the firm at GetIRSHelp.com or at (813) 229-7100. Have the levy notice, your bank statements and your monthly bills ready. For the bigger picture, start with the first 24 hours guide.