Can The IRS Take Your 401(k) for Back Taxes?

Your 401(k) is a symbol of your hard work, steadfast savings, and of course, your eventual transition into retirement. Having enough money to retire comfortably is not only a great safety net to have, but it can also help ensure that you have plenty of cash to afford the hobbies, projects, and vacations you’ve been planning on. But before you begin planning out your sunset years, there’s something you should know — the IRS can take your 401(k) to settle up tax debts

In this post, we’ll be discussing the IRS’ rights to 401(k) garnishment and seizure, your rights as a taxpayer, and how you can avoid these and other tax penalties. To find information on a specific topic, use the links below to jump ahead, or read through for a comprehensive take on the topic.

Can the IRS Garnish or Seize My 401(k)?

Yes. While creditors such as your bank typically cannot seize money from a retirement fund to settle up debt, the same rules do not apply to the Internal Revenue Service. If you have outstanding tax debt, the IRS may place a levy on your property in order to satisfy your tax debts.

A tax levy grants the IRS the ability to seize a taxpayer’s personal assets, including retirement money, savings accounts, and wages in order to make up for taxes owed. In addition to these financial assets, the government can also seize your house or car so that they can recoup the tax dollars owed.

Of course, there are certain conditions that must be in place in order for the IRS to garnish your 401(k) fund.

At what point can the IRS take my 401(k)?

So, when can the IRS take your 401(k)? According to IRS Publication 594, they may seize your property (including your 401(k)) via tax levy under the following circumstances:

  • You received a tax bill from the IRS
  • You neglected or refused to pay your outstanding taxes 
  • The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the seizure
Note: there are certain exceptions for when the IRS does not need to offer you a hearing 30 days before seizing your property, including:
  • The collection of the tax is in jeopardy
  • A levy is served to collect tax from a state tax refund
  • A levy is served to collect the tax debt of a federal contractor
  • A Disqualified Employment Tax Levy (DETL) is served

Which types of retirement accounts can the IRS seize?

If you owe back taxes and fall within the aforementioned circumstances, the IRS essentially has the right to seize your 401(k) or any other type of retirement program you may be partaking in, including:

  • Qualified Pension
  • Profit Sharing
  • Stock Bonus Plans under ERISA
  • IRAs
  • Retirement Plans for the Self-Employed (such as SEP-IRAs and Keogh Plans)
  • Thrift Savings Plan
  Which-Retirement-Plans-Can-the-IRS-Levy Note: The government can also take your 401(k) to cover child support, alimony, and other court-ordered dues if they have not been paid voluntarily by the individual.

Is it common for the IRS to seize a taxpayer’s 401(k)? 

Not necessarily. This is one of the last-resort actions the government can exercise in order to settle up an individual’s tax debt, and it generally only occurs after a tax lien has been enacted. These collection measures are typically imposed when a taxpayer has neglected to pay their tax debt over a long period of time or has committed some form of tax fraud or evasion. 

Although it’s not a regular occurrence, it’s important to know what you should do as a taxpayer if your property has been seized, and of course, how you can avoid the situation altogether. More on that a little later on in this post!

When the IRS cannot take your 401(k)

While the IRS may take a 401(k) in situations where taxpayers have not paid their taxes, refused to do so, or have committed some level of tax fraud, there are a few circumstances where the IRS cannot seize your retirement account.

If you have made an effort to pay your outstanding tax debt by enrolling in an Installment Agreement plan or have secured an Offer in Compromise, the IRS cannot take your property — this applies whether the agreements are current or pending.

Additionally, the IRS cannot take taxpayer property if they determine that doing so would cause economic hardship to the individual. In other words, if the taxpayer would be unable to meet their basic needs if assets were seized, the government would not move forward with property collection.

What to do if the IRS Takes Your 401(k)

The last thing you’d want after spending decades saving up toward your sunset years, is for the IRS to take your 401(k) or other retirement funds. So, it’s important to know exactly what steps you should take if you find yourself in such a situation.

If your property or federal payments are seized…
  • Gather your tax records and Notice of Intent to Levy
  • Call the number on your levy notice or 1-800-829-1040
  • Or, if you’re already working with an IRS employee, call him or her for help with your notice.
If the collections levy is already in place, your best means to extinguish the levy are to:
  1. Pay your outstanding tax liability in full
  2. Prove the levy is creating economic hardship 
  3. Reach an agreement with the IRS for tax debt to be settled:
    1. Instalment agreement
    2. Offer in Compromise
    3. Currently Not Collectible Status
Terminating-Levy Note: Navigating IRS procedures is no small task. If you’re unsure where to start, or just want to sort out your situation in a more efficient and effective manner, enlist the help of Community Tax. Our team of professionals are well-versed in tax preparation, tax resolution, and more; and we’ve helped over 70,000 clients with their tax needs.

Preventing a Tax Lien or Levy on Your 401(k)

Whether you’re facing a small tax bill from the IRS or substantial wage or retirement garnishment, dealing with tax debt is never easy. The best way to stay on top of your tax liabilities is to be responsive with the IRS and responsible for your tax dues.

Here are a few tax tips you can use to avoid trouble with the IRS:

  • Taxes should be filed and paid on time in order to avoid penalty charges and collections.
  • Any notice you receive from the IRS should be handled immediately — the longer you wait, the more aggressive collections actions may become.
  • If you want to avoid a tax lien or levy, it may be in your best interest to enroll in a repayment program, such as installment agreements in order to settle up your tax debts in a more manageable format. Contact us for a free tax consultation to learn which repayment plan may work best for you.
  • If you plan to claim economic hardship as a result of tax collections, be sure to have documented proof that exhibits your claim. Pay stubs, old tax paperwork, bills, etc.
  • Know that you do have the right to appeal through the IRS Collection Appeal program, or defer the tax lien or levy by submitting a Request for a Collection Due Process Hearing.

Bottom line, the best way to avoid a tax lien or levy is to file your taxes accurately and on-time, and pay your balance ASAP.

Key Takeaways & How Community Tax Can Help

Yes, the IRS can take your 401(k) or other retirement funds in order to satisfy outstanding tax debts. However, if you have a current or pending repayment plan in order, they are not authorized to impose a tax levy on your account. To prevent a tax levy from happening, make sure that your taxes are filed and paid in a timely and precise manner.

In trouble with the IRS? Community Tax can help. Our team of professionals supports you every step of the way — from identifying tax savings and preparing your taxes to offering tax resolution services, our team has you covered. Contact us for your free tax consultation today!