Understanding IRS Account Freezes and Other Debt Collection Actions

Dealing with tax obligations can be a daunting task, but the consequences of failing to pay back taxes and associated penalties can be severe. One of the more drastic measures taken by the Internal Revenue Service (IRS) is freezing your account. This article will explain why the IRS might freeze your account, the steps before and after an account freeze, and the broader picture of IRS debt collection actions.

Why Would the IRS Freeze Your Account?

The IRS will freeze your account as a last resort. Before reaching this point, the IRS typically attempts to work with you to find a payment plan or alter your existing agreement. However, if you ignore their letters, do not follow through with a proposed payment plan, or fail to comply with any agreements, the IRS may seize your bank account.

The process usually starts with letters every quarter, each one increasing the amount of interest due. These letters begin politely but eventually become more assertive, urging you to make contact with the IRS to arrange a payment solution. The IRS has patience, but it is not unlimited. Expect this process to take anywhere from one to two years before the agency takes drastic measures like an account freeze.

State Debt Collection

Unlike the IRS, state debt collection can be much more immediate and decisive. For instance, if you move to a new state but still owe taxes from your previous state, the situation can be complex. In my personal experience, moving to a new church in a new state led to a tax liability in the former state. A miscalculation from the state resulted in me taking two pay cuts, making it challenging to meet the tax obligations.

Within a year, the state forced an account to be seized, using the tax obligation as the leverage. While this particular account was not mine, it highlights how states often do not have the patience of the IRS and will take action to recover past due taxes.

Common Debt Collection Actions by the IRS

The IRS has a multitude of tools at its disposal for collecting tax debt. Beyond seizing bank accounts, they can also:

Wage Levies: Deduct money directly from your paycheck and: Seizure of Accounts Receivable: Collect money owed to a business you own: Bank Levies: Freeze your bank account for 21 days to assess the contents and: Seizure of Other Assets: Including investment property, vacation and second homes, RVs, and boats, if they are not your primary residence.

A bank levy is particularly invasive, as the bank will freeze your account for 21 days to allow any joint owner or other claimant with a superior claim to prove their position and protect their rights to any funds in the account. During this time, any deposits will be allowed, but no debits will post.

Preventing Account Freezes and Other Actions

To avoid account freezes and other severe debt collection actions, it is crucial to keep communication open with the IRS:

Contact the IRS: Respond promptly to any communication from the IRS, even if it is merely to acknowledge receipt of the letter. Explore Payment Options: Check for existing payment plans, offers in compromise, or other schemes that can help you manage your debt. Hire a Tax Professional: If you are unsure of the best course of action, consider consulting with a tax professional who can guide you through the complex tax laws and procedures.

Understanding and proactively managing your tax obligations can save you from the distress and financial strain of account freezes and other aggressive debt collection methods.