Taxation & Estate Planning

Protecting retirement accounts from IRS seizure.

By howardlevy

Retirement accounts are considered to be an investment that is protected from creditors.  But here is an interesting question from a reader about a big exception to that rule (yes, it is the IRS): 

Several years ago, I liquidated all of my retirement money to pay for gambling trips to the casinos.  My husband and I had a fairly substantial amount of tax due from the early withdrawal penalties. Now, I have been contacted by an IRS Revenue Officer, who is demanding that my husband liquidate his retirement money to pay our taxes.  It is the only savings we have, and I thought it was safe.  My question is: Can the IRS seize retirement accounts?

The IRS can seize retirement accounts, including 401k plans, IRAs, and self-employed plans like SEP-IRAs and Keogh plans.  There are no prohibitions in the Internal Revenue Code against it.      

The key to defending retirement accounts from IRS seizure is to understand that the IRS stands in your shoes, and can only get what you can get.  This means that if you cannot get to the retirement money, the IRS cannot get to it either. 

Many retirement plans do not provide for present rights to the money, allowing access only at separation from service, retirement or death/disability. If you are still employed, you likely have no ability to withdraw the retirement money, and the IRS has no ability to seize it.  Reference is found in Internal Revenue Manual 5.11.6.2, which governs IRS seizures of retirement accounts.

If you do have rights to the money and the IRS can get to it, it becomes important to understand (1) whether your conduct leading to the liability was flagrant and (2) whether you depend on the money in the retirement account, or will in the near future. Flagrant conduct includes tax evasion, fraud or making contributions to the account while the unpaid taxes were becoming due.  If it can be developed that your conduct was not flagrant or that you will depend on the retirement money, Internal Revenue Manual 5.11.6.2 specifically states that the retirement account is not to be levied.    

I have seen the IRS readily back off when it is established that there are no rights to the money.  I have also seen aggressive IRS Revenue Officers agree not to take a retirement account, but decide to put pressure on as to a levy on wages if the retirement money is not voluntarily withdrawn. 

The IRS is generally reluctant to take retirement accounts, and many times they cannot take action (such as when there are no rights to the money), but proper handling, negotiation and an understanding of the process is extremely important as to defending this very sensitive asset. 

Full post as published by IRS and the Law on March 15, 2009 (boomark / email).