Here is a bank levy's hidden cost. The bank charges you a fee to process the levy. Then the frozen money makes your mortgage payment bounce, and the bank charges you again. Then the mortgage company charges a returned-payment fee.
If the levy was correct, most of those costs are yours to absorb. If the IRS made a mistake, you may be able to get the bank charges back. The vehicle is Form 8546, Claim for Reimbursement of Bank Charges.
First, the bank cannot take its fee out of the IRS's share
This rule protects the IRS, but it explains where your fee comes from. IRM 5.11.4.4.3 says many banks charge customers for processing levies, but "the bank is not entitled to reduce the levy proceeds to collect the fee." The IRM's examples:
- A $1,000 levy on a $1,500 account: the bank sends $1,000 and collects its fee from the other $500.
- A $1,000 levy on an $800 account: the bank sends $800 plus interest.
If a bank shorts the IRS to cover its fee, the IRS can send Letter 4030 demanding the difference. So the fee comes out of your remaining money, or it creates an overdraft.
When the IRS will reimburse bank charges
Reimbursement is governed by Policy Statement P-5-39, which is printed on the back of Form 8546 (Rev. 11-2024). It covers three situations: an erroneous levy, stopping payment on a check the IRS lost or misplaced, and processing errors on a Direct Debit Installment Agreement.
For erroneous levies, all three of these criteria must be present:
- The IRS acknowledges the levy was erroneous.
- You did not contribute to continuing or compounding the error.
- Before the levy, you did not refuse, orally or in writing, to timely respond to IRS inquiries or provide information relevant to the liability.
IRM 5.11.4.9 gives two examples of the kind of IRS error that qualifies:
- You paid the amount owed, but the payment was not posted in time.
- An installment agreement was secured, but it was not loaded on the IRS system in time.
The IRM's broader discussion of erroneous levies adds another: a levy served after the taxpayer paid in full with a check that turns up among unidentified remittances. The instruction is to release the levy, and "any related bank charges may be reimbursed" (IRM 5.11.2.3.2.3).
What counts as a reimbursable bank charge
The policy statement defines bank charges to include "a financial institution's customary charge for complying with the levy instructions as well as charges for overdrafts that are a direct consequence of an erroneous levy." The IRM similarly lists fees for processing the levy and bad check charges directly caused by the levy (IRM 5.11.4.9).
Two conditions on the money itself: the charges must have been paid by you, and they must not have been waived or reimbursed by the bank. So ask your bank to waive the fees first. If it does, you have nothing to claim. If it does not, you have proof that you paid.
Notice what is not on the list: late fees charged by your landlord, your mortgage servicer, or your credit card company. Form 8546 is about bank charges. Broader economic damages from unlawful collection are a different claim. See damages for an unauthorized bank levy.
The deadline and the cap
Per the Form 8546 instructions, claims "must be made within one year of the date the claim accrues and are limited to $1,000," citing 31 U.S.C. § 3723. The IRM puts it as filed within one year after the fees are charged, limited to $1,000 (IRM 5.11.4.9.1).
One year sounds generous. It is not, when you spend the first three months fighting about the levy itself. File the reimbursement claim once the IRS has acknowledged the error, even if other parts of your case are still open.
How to file Form 8546
Where it goes
The form says to submit it to the address of the IRS office that served the levy. That address is on your copy of the levy.
Who signs
The claimants must sign. For an erroneous levy on a joint bank account, each owner on the account must sign as a claimant (Form 8546 instructions; IRM 5.11.4.9.1). An authorized agent or legal representative can sign if the claimant cannot because of disability, death, or another acceptable reason, with proof of authorization.
What to attach
The instructions list:
- A copy of the levy.
- Records showing the bank charges caused by the erroneous levy.
- Records showing the charges have been paid.
Supporting records must include bank statements and correspondence, and you should include any documentation explaining or acknowledging the IRS error. If the IRS sent you Letter 4262 confirming an erroneous levy (IRM 5.11.2.3.2.3), attach it.
Getting paid
If you fill in the electronic funds transfer section, an approved claim can be paid by direct deposit. Otherwise the IRS sends a check. The IRM describes the internal approval and payment process, including the use of Fiscal Service Form 197 and, if the approved amount differs from what you claimed, a letter asking you to sign acceptance forms (IRM 5.11.4.9.3).
If the claim is denied
The IRM is blunt: "There are no Appeal Rights for denial of Claim for Reimbursement of Bank Charges" (IRM 5.11.4.9.2). If the claim is missing information, the IRM tells employees to try to get it from you rather than simply rejecting it. If it does not meet the criteria, you get a brief disallowance letter explaining why.
There is a fallback. The same IRM section says claims not covered by Policy Statement 5-39 "can be considered under the discretionary authority of the Small Claims Act (SCA) by the IRS Claims Manager." And for third parties, such as a co-owner or a stranger whose account was hit by a wrongful levy, the IRM says requests for reimbursement of bank charges can be considered under the Small Claims Act authority as well (IRM 5.11.2.3.2.1). See wrongful levy claims.
A practical sequence
- Get the levy released or the money returned first. That is where the real dollars are. See getting the levy released and getting levied money back.
- Get the IRS to acknowledge the error in writing. Ask for Letter 4262 or a written statement.
- Ask your bank to waive the charges. Some will, especially with the IRS letter in hand.
- File Form 8546 for what the bank would not waive, within one year, with every statement attached.
- Calendar a follow-up. Claims processing is internal and not appealable, so be organized and polite.
One overdraft fee will not make or break your case. But if the IRS caused it, the IRS should pay it.
For more on levy problems generally, see the firm's page on IRS tax levies.