Owing money to Uncle Sam is nothing to take lightly. If you neglect to remediate overdue tax debts, the IRS has the authority to take a number of swift and serious consequential steps to ensure your debts are fulfilled by any means. Can retirement pensions be garnished? Can the IRS take your IRA? Put simply, yes. If you owe back taxes, the IRS can legally garnish your pension, 401(k), and other classifications of retirement accounts.
Not only is the IRS legally authorized to garnish your pension and retirement accounts, but it is their duty to recompense unpaid debts from taxpayers. Anytime you become delinquent in paying your taxes, you can expect the IRS to step in and utilize all legal means to settle your account.
In this post, we’ll break down the details of the lengths the IRS can go to recoup outstanding tax debts and answer all of your questions about pension garnishments.
Pension garnishment: The basics
In most cases with traditional creditors, pensions and other forms of retirement income are exempt from garnishment. However, if you owe the IRS a delinquent federal income tax balance, the federal government grants them the ability to garnish your assets to demand and recoup payment. This process is called a tax levy.
When the IRS places a levy against your assets, they gain access into any funds available in your pension or other retirement accounts. While some regulations restrict the amount of money the IRS can levy against, other regulations determine when the IRS can collect the funds from your account.
Why would the IRS garnish my pension or retirement accounts?
The IRS only garnishes pensions and retirement accounts when the taxpayer in question owes unresolved back taxes. All forms of IRS garnishment are typically considered last-resort proceedings to demand immediate repayment on overdue back taxes. If you’re a few weeks or a couple of months overdue—fear not. The IRS will only hunt you down and pin a levy against you if they have been trying to communicate with you and demand repayment over a significant amount of time.
However, prior to the seizure of all of your assets or funds, the IRS must issue a written note detailing the outstanding balance of your tax due and a request for payment. Failure to respond to this official notice results in an additional final notice from the IRS that outlines their intention to collect your assets
The IRS will conduct an audit to decide what assets you possess before taking your properties. If these funds have enough equity to repay your overdue taxes, the IRS can lawfully seize them. However, if they do not have enough money to settle the remaining balance, the seizure is exempted.
The IRS will not go after your retirement funds in most situations due to the fact that these accounts are challenging to obtain in many cases. Yet there are some exceptions. If your conduct has been flagrant in regards to your outstanding balance, the IRS may take that extra step in seizing your pension, 401(k), IRA, or other types of retirement savings account.
Examples of flagrant conduct include:
- Committing tax fraud
- Committing tax evasion
- Making contributions to your retirement accounts while simultaneously refusing to settle your tax debt
In the event that you are able to prove that your conduct was not flagrant, you may be able to prevent the IRS from placing a levy against your retirement funds.
Which assets can the IRS levy?
Federal law grants the IRS reasonable leeway to pursue the repayment of outstanding debts that a taxpayer owes to the federal government. When you fail to pay your taxes over an extended period of time, the IRS can legally levy retirement resources including:
- Military pensions
- Social Security payments
- Civil service pensions
- Employee or self-sponsored retirement accounts
- Retired railroad worker benefits
Additionally, the IRS can further impose a levy on your savings and checking accounts as well as any future tax refund checks to guarantee that your unpaid tax liability is recouped in full. It also has the power to tax assets that exceed a specified monetary value, such as vehicles, second homes, RVs, real estate, life insurance policies, and other personal properties.
What the IRS can not levy
Although the IRS is federally authorized to claim a spectrum of retirement investments and benefits, the IRS can not legally impose levies against any form of need-based pension benefits.
Among these types of exempted need-based retirement assets include:
- Workers compensation benefits
- Supplemental Social Security for the elderly
- Public assistance payments or cash welfare
- Employer-sponsored retirement account withdrawals
While the IRS can not force you to withdraw money from an employer-sponsored retirement account, they may impose a levy on any withdrawals you make beyond the designated time constraints or waiting period.
Are there any monetary limitations the IRS must follow?
Now that you know the IRS can garnish your pension and retirement accounts, you’re likely wondering how much can the IRS garnish? Fortunately for taxpayers struggling to repay outstanding debts, the federal government has a number of regulations in place that prevent the IRS from claiming all of your saved retirement money.
The Internal Revenue Code declares the IRS can demand as much as 15 percent of contributions received from retirement assets such as pensions and social security benefits. Do note that the IRS introduced a new strategy in 2012 that decidedly encouraged the service to avoid going after pensions and instead pursue placing levies against other assets as collateral to recoup individual tax debts.
How can I prevent the IRS from garnishing my pension and retirement accounts?
When you think of retirement, you think of peaceful days without any worries of IRS hardship— however, retirement does not exempt you from paying outstanding debts owed back to the federal government. The number one way to prevent the IRS from garnishing your pension or other retirement accounts is by settling your debts as soon as feasibly possible.
Wondering what steps you should take to settle your account and secure your pension? The most straightforward option is to repay your IRS debt in full. If you are in a financially stable place to zero out your account, pursue this option first—it’s the quickest way to get Uncle Sam off your back and the swiftest way to ensure your pensions and retirement assets remain untouched.
Other options include liquidating assets like real estate, cars, or valuable belongings like jewelry. It also may entail cashing in a life insurance policy. However, these options should be approached with caution, especially if doing any of the aforementioned resolves might put you into financial jeopardy.
If you’re unable to repay your owed back taxes, the next best solution is to contact the IRS to set up and negotiate an installment agreement plan. Your payments would be based on the income you earn or bring in each month. You will be expected to pay back your tax debts within a 10-year span.
Let Community Tax help
If you are in danger of having your pension or retirement assets garnished and you’re feeling overwhelmed trying to mitigate the situation to prevent the worst from happening—fear not. Contact a Community Tax expert today to discuss your options.