When an IRS levy lands, people tend to get angry at the bank. I understand it. The bank is the one that froze the account and bounced the mortgage payment.
But the bank is in a box. Federal law tells it exactly what to do, punishes it if it does not, and protects it if it does. Once you understand the bank's position, you stop wasting time arguing with your branch manager and start working on the people who can actually release the levy.
The bank's legal duty: surrender on demand
IRC § 6332(a) says any person in possession of property subject to levy, upon which a levy has been made, "shall, upon demand of the Secretary, surrender such property." There is one carve-out: property already subject to an attachment or execution under judicial process at the time of the demand.
For banks, the timing is modified by IRC § 6332(c). The bank holds levied deposits for 21 days and surrenders them only after that period. The details are in the 21-day hold explained.
The IRM expects speed on the front end. When a levy is served in person, the bank representative who signs for it is an authorized recipient, and the IRM's expectation is that the person will "immediately process the levy and freeze the affected accounts" (IRM 5.11.4.11). Banks may ask the IRS to mail levies to a central address, but the IRM says that does not stop a revenue officer from serving one in person at a branch.
Why the bank will not just say no
Two provisions make refusal very expensive.
Personal liability. Under IRC § 6332(d)(1), a person who fails or refuses to surrender levied property becomes liable in its own right for the value of what it did not surrender, up to the tax being collected, plus costs and interest.
A 50 percent penalty. Under IRC § 6332(d)(2), if the refusal is without reasonable cause, there is an added penalty equal to 50 percent of the amount recoverable. That penalty does not even reduce your tax debt.
The IRM lays out the follow-up if a bank balks. The revenue officer explains § 6332, then serves Form 668-C, Final Demand for Payment, and allows the bank five days to respond before taking enforcement action (IRM 5.11.2.2.9). If a levy is served and a bank employee refuses to accept it, the IRM says to leave it anyway and tell the employee the bank will be liable for all funds on deposit as of that date and time (IRM 5.11.4.11).
And then there is the carrot. IRC § 6332(e) says a person who honors a levy is discharged from any obligation or liability to the delinquent taxpayer "and any other person" arising from the surrender. Your bank cannot be sued by you or by your joint account holder for doing what the levy said. That is why banks comply.
How the bank finds your accounts
A levy does not list every account number. The bank has to search. According to IRM 5.11.4.11.1, the instructions on Form 668-A tell the recipient to make a reasonable effort to identify all property belonging to the person named, and at a minimum to search using the name, address, and identifying number on the levy.
The IRM then walks through matching examples that matter in real life:
- A different EIN does not necessarily defeat a match. If the business name is uncommon and the address is the same, the IRM calls it a reasonable match even with mismatched EINs.
- An unusual personal name alone can be enough, even with a different d/b/a and EIN.
- When in doubt, the bank calls the number on the levy for guidance, for example when "Inc." appears on one record and not the other.
The IRM's note on this is blunt: the TIN is not the sole indicator of the taxpayer's property in a bank account. If your sole proprietorship account, your single-member LLC account, and your personal account share your name and address, expect all three to be reviewed. Business account issues are covered in IRS levies on business bank accounts.
The levy also reaches accounts where you are not the only name. A levy attaches to funds in an account where the taxpayer has an unrestricted right to withdraw, even with multiple signers (IRM 5.11.4.3). The bank may send the entire balance at the end of the hold and is not liable to the co-owner. The co-owner's remedy is against the government. See joint accounts and IRS levies.
What the bank sends, and what it cannot take
The bank sends the funds that were in the account when the levy was served, up to the levy amount, plus interest earned during the hold if the balance was short of the levy amount (Treas. Reg. § 301.6332-3(c)(2); IRM 5.11.4.4.1).
Some banks once tried to dodge the interest rule by moving levied money into a non-interest "holding" account. The IRM says those methods are not grounds to avoid paying interest on levy proceeds (IRM 5.11.4.4.2).
On fees, the IRM is equally clear. Many banks charge customers a fee for processing a levy, but the bank is not entitled to reduce the levy proceeds to collect it (IRM 5.11.4.4.3). If a bank shorts the IRS to cover its fee, the IRS can send Letter 4030, which warns the bank that failure to remit may lead to a suit for failure to honor a levy.
That rule protects the IRS, not you. The fee usually comes out of your other money. If the IRS caused the levy by mistake, you may be able to recover bank charges with Form 8546. See bank fees from an IRS levy.
Where a bank can push back
A bank is not a pure pass-through. The law gives it a few legitimate positions.
Its own secured loan
IRC § 6323(b)(10) protects a bank's loan secured by a deposit account at that same institution, to the extent the loan was made without actual notice or knowledge of the tax lien. The IRM's list of conditions adds that the loan must be a commercial loan to the depositor who pledged the account. IRM 5.11.4.10, citing Rev. Rul. 2006-42, says this super-priority "is not a defense to a levy," but the IRS may release the levy in whole or in part if the bank proves it meets the requirements.
Prior judicial process
Property already subject to an attachment or execution under judicial process at the time of the levy is excepted from surrender under § 6332(a).
Money that is not the taxpayer's
The IRM recognizes that some accounts hold other people's money. Its example is school bank accounts that contain Department of Education student aid funds, where the IRS works with the Department before enforcing or releasing (IRM 5.11.4.8). Mortgage escrow accounts the taxpayer cannot withdraw from are also out of reach (IRM 5.11.4.7).
The bank's records and your privacy
IRC § 6333 lets the IRS demand that a person with custody of property subject to levy exhibit the books and records relating to it. The IRM says a revenue officer may follow a levy with a summons if a bank refuses to provide balance information, and may use a summons to check whether the bank did a thorough search for all of your accounts (IRM 5.11.4.11). The IRM also records Chief Counsel's position that a § 6333 demand is an exception to the Right to Financial Privacy Act (IRM 5.11.2.2.8).
Translation: do not expect bank secrecy to keep an account hidden once the IRS knows where you bank. How the IRS learns that is its own topic. See how the IRS finds your bank account.
How to work with your bank during a levy
- Ask for a copy of the levy and the date and method it was received. That date starts the 21 days.
- Ask which accounts were frozen and for how much. Ask whether funds above the levy amount are available.
- Ask about fees and overdrafts in writing, and keep the statements. You may need them for a Form 8546 claim.
- Do not ask the bank to "release" the hold. It cannot. Only the IRS can, by sending a release.
- When the IRS agrees to release, ask that it be faxed directly to the bank's levy department, then call the bank to confirm receipt before day 21.
The bank holds the money. The IRS holds the key. Spend your energy on the key.
The release itself is the subject of how to get an IRS bank levy released. For a broader view of the firm's approach to levies, see getirshelp.com.