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What is the cost of failing to apply IRS Levy?

A recent case details what can happen when a bank does not immediately apply an Internal Revenue Service levy to freeze a bank account. The bank was on the hook for the amount that its customer withdrew.

When a taxpayer is unable to pay a tax bill, the IRS has various collection tactics. The agency can take money directly from your bank account or paycheck through a bank levy or wage garnishment. Here, the IRS notified a taxpayer that it intended to levy his bank account.


James Waterman owed $92,770 in back taxes. An IRS collection officer found that he had two accounts with $47,375, so he applied for a jeopardy levy. These allow for collection when it appears the taxpayer may try to move the assets.

The officer visited Waterman to request payment of the taxes. When Waterman refused to pay, the officer served documents indicating a notice of intent to levy his bank account.

Then the race was on – the collection officer served the levy on an employee at the bank. But two hours later Waterman withdrew $40,000 from one of the accounts. The bank put a freeze on the accounts two days later and sent the IRS the remaining balance.

The IRS sought the missing $40,000 from the bank. The only defenses to a levy are that there is no property to hand over or a prior claim to the property exists. Federal statute requires that a bank hold onto and then hand over any property that is subject to levy or become liable for its disappearance. The bank argued that it froze the accounts within a reasonable amount of time, but the judge was not persuaded and found the bank liable.

This case demonstrates the immediate action required when notified of a bank levy. A tax attorney may be able to advise and assist in avoiding a levy by negotiating another payment option with the agency.

Source: Forbes, "Bank Out 40 Grand When It Allows Withdrawal Two Hours After IRS Levy," Peter Reilly, August 27, 2014.

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