Can the IRS Seize Assets During an Investigation? Power and Limits

Can the IRS Seize Assets During an Investigation? Power and Limits

The IRS has broad authority to seize assets in the course of a tax investigation or audit. However, there are limits on when and how the IRS can take this action. Understanding the IRS’s power to seize assets, and your rights in the process, is important if you find yourself facing a tax investigation.

IRS Power to Seize Assets

The IRS derives its power to seize property from Section 6331 of the tax code. This law authorizes the IRS to levy property to collect unpaid taxes. A levy allows the IRS to seize assets such as:

• Wages
• Bank accounts
• Social security payments
• Retirement accounts
• Real estate
• Cars
• Boats
• Other property

In most cases, the IRS must provide written notice to the taxpayer first, in the form of a Notice of Intent to Levy. This gives the taxpayer 30 days to resolve the issue before assets can be seized. However, there are exceptions where the IRS can levy property without warning, discussed below.

IRS Power to Seize Before Assessment

Ordinarily, the IRS cannot actually seize property until after it has made a formal assessment of taxes owed. However, Section 6861 of the tax code gives the IRS power to make a “jeopardy assessment” and immediately levy assets in certain circumstances.

A jeopardy assessment can be made if the IRS believes collection of the tax will be “jeopardized by delay.” This may occur if, for example, a taxpayer appears to be planning to leave the country or hide assets.

To make a jeopardy assessment, the IRS must determine the following:

• The taxpayer owes taxes
• The amount owed can be immediately assessed
• Collection of the tax will be jeopardized by delay

If these conditions are met, the IRS can immediately seize assets without going through the usual assessment procedures. The taxpayer then has 30 days to request judicial review of the jeopardy assessment in Tax Court.

Warning Notice Requirements

As mentioned above, in most cases the IRS must provide written notice before levying property. This requirement comes from Section 6331(d), which states the IRS must provide notice of the following:

• The amount owed
• Notice of the IRS’s intent to levy
• The taxpayer’s right to a Collection Due Process hearing

This notice gives the taxpayer 30 days to resolve the issue before a levy can happen. Resolving the issue may involve paying the tax, making an installment agreement, or requesting a Collection Due Process hearing.

Exceptions Allowing Seizure Without Notice

There are some exceptions where the IRS can levy property without sending its usual notice:

• Jeopardy assessments – As discussed above, if the IRS believes delay will jeopardize collection, it can immediately seize assets.
• State tax refunds – The IRS can levy state tax refunds without notice.
• Wages and salary – For collection of employment taxes, the IRS can levy up to 15% of wages or salary without notice.
• Cash businesses – If the IRS finds a taxpayer is operating a cash-based business and not properly accounting for income, it may immediately seize assets.

Limits on IRS Power to Seize Property

While the IRS has broad levy powers, there are some limits. The IRS cannot seize assets that are exempt under Section 6334 of the tax code.

Some examples of exempt assets include:

• Basic necessities like clothing, food, fuel, and medical care
• Tools for a trade or profession, up to a specified amount
• Unemployment and certain other benefits
• A personal residence, up to a specified amount of equity
• Certain retirement assets
• Life insurance and education savings

So the IRS cannot completely wipe out a taxpayer by seizing everything they own. The exemptions ensure taxpayers maintain sufficient resources to provide for basic living expenses.

Seizure of Personal Residence

As noted above, a personal residence receives some protection from IRS seizure under Section 6334. However, the IRS can still levy and sell a personal residence in certain situations.

To levy a personal residence, the IRS must obtain approval from a federal district court. This requires proving not only that taxes are owed, but also that seizing the home is appropriate after weighing all the facts and circumstances.

The IRS also cannot seize a personal residence while a pending request for an installment agreement or offer-in-compromise is being considered. This prohibition comes from Section 6331(k) of the tax code.

Seizure Approval Process

IRS agents cannot independently decide to seize property as they wish. There is an approval process in place to ensure seizure is appropriate.

According to the IRS Manual, seizing most assets requires approval from the Collection Manager. Higher-level approval from Collection Advisory or counsel may be required for:

• Seizure of a personal residence
• Seizure of business assets that would force a business to close
• Other seizures where there are special circumstances

So the IRS has an oversight process to ensure seizure is justified based on the facts and circumstances of each taxpayer’s case. IRS agents cannot decide to impose a levy on their own without going through proper approval channels.

Getting Seized Property Returned

If the IRS seizes property, the taxpayer does have recourse to get it returned. According to the IRS, there are several options:

• Resolve the tax issue – Paying the tax owed or entering an installment agreement stops collection action and may result in assets being returned.
• Request a Collection Due Process hearing – This is a formal hearing with Appeals where the taxpayer can argue against the levy.
• Request return of levied funds – If the levy threatens health or business, funds can be returned.
• Request release of levy – If property was wrongfully levied, the IRS may release the levy.
• File a civil suit – A wrongful levy suit can be filed in federal court for return of property.

The IRS is required to return levied property if the taxpayer enters an installment agreement to pay the liability. The IRS also cannot seize property while an innocent spouse relief request is pending.

Using Bankruptcy to Stop IRS Seizure

Filing for bankruptcy triggers an automatic stay that stops IRS collection efforts, including levies. This gives the taxpayer breathing room while working out a repayment plan or bankruptcy discharge.

To levy property after a bankruptcy filing, the IRS must get approval from the bankruptcy court. The court will determine if seizure of assets is appropriate based on the facts.

Involving an Attorney

A taxpayer facing IRS threats to seize property should consider involving a tax attorney or CPA. A tax professional can communicate with the IRS, negotiate alternative resolutions, and protect the taxpayer’s rights.

An attorney can also request that the IRS release a levy or return seized property when appropriate. If negotiations fail, they can represent the taxpayer in court if needed.

Takeaways

• The IRS can seize property like wages, bank accounts, and real estate to satisfy unpaid taxes.
• The IRS usually must provide written notice before levying assets.
• There are limits on what property the IRS can seize.
• Taxpayers have rights to challenge an IRS levy and request return of property.
• Involving a tax professional is recommended if the IRS threatens to seize assets.

While the IRS wields strong seizure powers, taxpayers have rights too. Understanding the levy process and taking prompt action can help protect assets from IRS grasp.

References

IRS. “Topic No. 201 – The Collection Process.” https://www.irs.gov/taxtopics/tc201. Accessed 16 September 2023.

IRS. “What Happens After My Property is Seized and How Do I Get It Back?” https://www.irs.gov/businesses/small-businesses-self-employed/what-happens-after-my-property-is-seized-and-how-do-i-get-it-back. Accessed 16 September 2023.

IRS. “5.17.2 Federal Tax Liens.” https://www.irs.gov/irm/part5/irm_05-017-002. Accessed 16 September 2023.

Department of Justice. “Asset Forfeiture Policy Manual 2023.” https://www.justice.gov/criminal-afmls/file/839521/download. Accessed 16 September 2023.

Investopedia. “What Is a Levy? Definition, How It Works, and Examples.” https://www.investopedia.com/terms/l/levy.asp. Accessed 16 September 2023.