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Independent Retirement Accounts are tax-deferred retirement savings plans. Under both federal and state laws, IRAs are often protected from creditors. However, these protections are not available when the creditor is the Internal Revenue Service. The IRS can levy against your IRA to satisfy outstanding federal tax obligations. When the IRS places a levy against your IRA, the agency does not need to seek a court judgment to collect the funds.
Right to Collect
The Internal Revenue Service may create a lien against your assets after you have been notified in writing of the past-due tax amounts and have failed to pay those amounts. The IRS may collect the amount due by seizing any assets that are not exempt from levy. Individual Retirement Accounts are among the assets that the IRS can seize to satisfy a lien for outstanding taxes.
Requirement to Levy Other Assets First
The levy against an IRA is a last resort only to be used when other assets are not available. The Internal Revenue Service regulations specify that the agency first consider other property and assets that are available to collect the outstanding amount owed, as well as the expense of pursuing those other assets. If property other than retirement assets and IRAs are available or if a payment agreement can be reached, those alternatives must be considered before issuing a levy on an IRA.
Taxpayer Conduct Considered
When the Internal Revenue Service decides whether to levy against your Individual Retirement Account, it must also examine your conduct during the tax collection process. The agency must determine whether your conduct has been "flagrant." Examples that the agency considers to be flagrant conduct are: voluntary contributions to retirement accounts during the period the taxpayer knew unpaid taxes were accruing; conviction of tax evasion for the tax debt; assessment with a fraud penalty for the tax debt; assisting others in evading tax; or liabilities based on illegal income.
Protection of Necessary Living Expenses
The IRS must determine if you depend on the funds in your IRA for necessary living expenses by conducting a financial analysis of your living expenses and life expectancy to estimate how much can be withdrawn yearly to deplete the IRA in your lifetime. If you are dependent on your IRA money, or if you will be soon, the agency will not levy against the IRA. In addition, the IRS will also consider special circumstances, including extraordinary expenses or other sources of income that will be available to pay expenses during retirement.