This is one of the most frustrating calls I get. "I don't owe the IRS anything. My husband does. Why is my money frozen?"
Short answer: because the law lets the IRS levy first and sort out ownership second. The co-owner is not powerless, though. The law gives the non-liable owner specific tools, and the 21-day bank hold was designed with exactly this problem in mind.
Why the IRS can freeze the whole account
The Supreme Court settled the basic question in United States v. National Bank of Commerce, 472 U.S. 713 (1985). The IRS levied two joint accounts at an Arkansas bank for the income taxes of one of the three people named on the accounts. The Court held the delinquent taxpayer's unrestricted right to withdraw the funds was "property" or "rights to property" subject to a provisional IRS levy, even though other people might have claims to the money and ownership was unresolved at the time. The Court pointed to the remedies third parties have: an administrative claim for return under § 6343(b) and a civil action under § 7426.
The IRM follows that rule. IRM 5.11.4.3 says a bank levy attaches to funds in an account where the taxpayer has an unrestricted right to withdraw, "even if multiple persons have signature authority for that bank account," citing Treas. Reg. § 301.6332-1(c)(4).
The IRM's example: a $2,000 levy is served on a joint account holding $2,000. All of the deposits were made by the third party, not the taxpayer. The bank may send the entire balance at the end of the 21-day hold, and the bank is not liable to the third party "even if the third party proves that the funds in the account did not belong to the taxpayer." The third party's remedy is against the United States.
The IRS is supposed to think twice
The IRS has the power, but its own manual counsels caution. IRM 5.11.2.2.1 says that any property in which the taxpayer has an interest is subject to levy, even if jointly owned, "However, because wrongful levy suits and claims can result from such levies, consider levying on another available source." It also says that if the taxpayer owns property with a person not liable for the tax, revenue officers should consider using another source.
That is a useful line to quote when you call. It does not make the levy unlawful, but it supports an argument for a release or for levying elsewhere.
Use the 21-day hold to prove ownership
The holding period exists for this. The IRM describes the 21-day hold as established "to settle disputes regarding ownership of bank accounts before money is remitted to IRS" (IRM 5.11.4.1).
When a co-owner claims the money, the IRM tells employees to treat it as a potential wrongful levy and, if more time is needed, to ask the bank to hold the funds to a specific date, give the co-owner a deadline to provide substantiation, and provide Publication 4528 (IRM 5.11.4.3). If the IRS determines the funds are not the taxpayer's before they are forwarded, the IRM says to release the levy as soon as possible (IRM 5.11.2.3.2.1).
So the co-owner's job, fast, is to prove whose money it is.
What proof works
- Deposit records tracing the balance to the co-owner's paychecks, benefits, or other income.
- Pay stubs and direct deposit forms showing the co-owner's employer deposits to that account.
- Account history showing the liable person did not contribute or withdraw.
- How and why the account was opened, for example a parent who added a child as a convenience signer.
The IRM's CAP section even gives an example worth repeating: a levied account "may actually be the asset of the child of the taxpayer but the taxpayer's SSN is on the account" (IRM 5.1.9.4).
The co-owner's tools
Before the money leaves the bank
- Call the number on the levy with proof. Ask the IRS to release the levy or ask the bank to extend the hold while ownership is reviewed.
- Collection Appeals Program. Third parties claiming a wrongful levy "are entitled to CAP before the levy proceeds are turned over to the IRS" (IRM 5.1.9.4). See CAP and bank levies.
After the money is sent
- Administrative wrongful levy claim under § 6343(b), following Publication 4528 and Treas. Reg. § 301.6343-2. Interest is paid on returned money under § 6343(c).
- Wrongful levy lawsuit under § 7426(a)(1) in federal district court. Under § 7426(c), the underlying assessment is conclusively presumed valid in that suit; the fight is about ownership, not the tax.
Deadlines: generally two years from the levy for both the administrative claim and the suit, with the suit deadline extended if a timely claim is filed (§ 6343(b); § 6532(c)). Full detail in wrongful levy claims.
Spouses and joint tax liabilities
If both spouses signed the joint return that created the debt, the joint account is not wrongfully levied just because both names are on it. Under IRC § 6013(d)(3), liability on a joint return is joint and several. The IRM even requires the IRS to include both SSNs on a levy for a joint liability (IRM 5.11.2.2.2).
A spouse who believes they should not be liable for the joint tax has a different set of tools: spousal defenses such as innocent spouse relief, which can be raised in a CDP hearing (§ 6330(c)(2)(A)(i)). That is a liability question, not a wrongful levy question.
The reverse situation matters too. If one spouse is protected from levy, for example by a bankruptcy stay, the IRM says the levy should name both spouses but state that it "does not attach the property and rights to property" of the protected spouse (IRM 5.11.2.2.2).
Community property and Florida entireties accounts
State property law can change the analysis. In community property states, the IRM has special procedures for levying a taxpayer's community interest in a non-liable spouse's property (IRM 5.11.6.13, referenced in IRM 5.11.2.2.2). In Florida, married couples' joint accounts may be held as tenants by the entireties, which raises its own federal tax issues. See entireties accounts and IRS levies.
What not to do
- Do not waive the hold. All depositors must agree to a waiver (Treas. Reg. § 301.6332-3(c)(4)). The co-owner should not sign one.
- Do not wait for the IRS to figure it out. The bank is protected for paying under § 6332(e). The burden of speed is on the co-owner.
- Do not keep commingling going forward if the liable person's tax problem is ongoing. Separate accounts reduce future fights. The IRS can levy again under § 6331(c).
The IRS gets to freeze first. The co-owner gets 21 days to prove it is their money. Use every one of them.
For bank charges a co-owner incurs because of a wrongful levy, see bank fees and Form 8546. For an overview of the firm's levy practice, see tax levies at getirshelp.com.