Individual Retirement Accounts, also known as Individual Retirement Arrangements or IRAs, are accounts that hold investments intended to cover the expenses you have after you quit working. When you fall behind on your taxes, however, it becomes a real possibility that the Internal Revenue Service will seek a levy against you. Contrary to what many investors believe, IRAs are subject to levies.
Section 6334 of the Internal Revenue Code indicates what properties are exempt from levies by the Internal Revenue Service. Although this section does make some allowances for certain annuities and pension payments such as those issued under the Railroad Retirement Act, it does not list Individual Retirement Accounts. This is reiterated in the Internal Revenue Manual in Section 22.214.171.124.1, which further states that no other properties are exempt from levy and that no local or state law can exempt property from levy to cover federal tax debt. Section 126.96.36.199, "Notice of Levy in Special Cases," also lists IRAs as a retirement account that may be levied. Under these codes, the IRS can and does garnish and levy IRAs.
When the IRS Garnishees IRAs
Section 188.8.131.52 of the Internal Revenue Manual clearly indicates that IRAs are not exempt from levy. However, this section of the manual also stipulates that the IRS will levy only in "flagrant cases." In other words, the IRS will not automatically go after your IRA. Because the IRS recognizes that the IRA is a tool that provide for the welfare of the IRA owner, it does not attempt to levy IRAs unless it has no other options available. The IRS usually tries to get you to liquidate other assets first or tries to levy accounts not tied to your retirement. Levy of an IRA is a last resort to collect what you owe in taxes.
The IRS assesses a 10 percent penalty on non-qualified distributions, or withdrawals, from an IRA when the distribution does not occur in accordance with IRA regulations. IRA regulations stipulate that the penalty applies to any withdrawal taken prior to age 59 1/2. When the IRS levies your IRA, the withdrawal the IRS takes counts as a distribution. However, the IRS recognizes that people whose IRAs are under a levy likely will not be able to pay the 10 percent penalty. They thus waive the penalty, as explained by Ken Golliher of BankersOnline.com and Mike Habib of Myirstaxrelief.com.
Taxpayers have many options to prevent a levy on their IRAs. For instance, you might be able to tap into the equity in your home to get a loan that covers the payments. Looking over your previous tax returns and correcting errors via amended returns also may reduce the liability you have. Additionally, it is generally a mistake to think that cashing out the IRA will protect your funds from an IRS levy. IRS levies may attach to any assets or property you have that is not exempted under Section 6334 of the Internal Revenue Code, so simply transferring the money from one account to another or using it to purchase property will not help. It's best to be direct with the IRS about your situation to see what your options are as soon as you start to get behind on the debt.
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