Owe a Sizable Tax Debt? Your Pension Could Be in Jeopardy
Here’s one of the most frequent questions people ask me about back taxes.
“Can the IRS garnish my pension to compensate for back taxes?” This question is essential because most people rely on their pensions for retirement. Understanding the extent of IRS collection power can save you from financial stress in the future.
The Internal Revenue Service can take severe actions if you continually ignore paying your tax debt. They can issue a lien against your property, levy your assets, garnish your wage, or take your refund to collect the money you owe them.
Contrary to what some may believe, pension funds are not entirely off-limits to the IRS. But while it is possible, the agency typically avoids going after your retirement accounts for back taxes. However, if they’ve exhausted all other options but you still haven’t paid, they can resort to garnishing your pension as a last-ditch effort to collect overdue taxes.
If you have unpaid taxes and fear that the IRS will come after your retirement fund, here are five things you need to know.
1. Flagrant behavior may cause the agency to initiate garnishment against your pension.
The IRS has various collection tools that allow it to collect taxpayers’ taxes. The most severe, which you would ultimately want to avoid, is a tax levy. When the government decides to issue a levy, they will seize your assets such as your home, wage, money from your bank accounts, and other valuable belongings to fulfill your tax debt. In rare cases, they can also tap into your retirement savings.
The IRS will be more likely to go after your pension or retirement account if they see you as flagrant. It means you’re doing something that is unacceptable or violates the tax law. Examples of these are committing tax evasion or tax fraud. Additionally, if you continually deposit money into your pension or retirement accounts, but ignore your tax bill, they will see it as a red flag and consider your behavior flagrant.
2. The IRS can only levy certain types of retirement accounts.
The IRS can seize your pension for unpaid taxes, but they can only levy certain types of accounts. This includes social security, military pensions, civil service pensions, and other retirement accounts like 401(K), Individual Retirement Account (IRA), and SEP-IRA.
It’s important to note that they can only levy these accounts if you have the right to withdraw from them. If your retirement account only allows withdrawals until you reach retirement age, the IRS cannot seize those funds.
3. There’s a limitation to how much the IRS can garnish.
While facing a levy is probably the worst thing you can experience, the good news is that when it comes to pensions, only a portion can be garnished. The amount the agency can take depends on factors like the type of accounts and applicable regulations. Generally, they can take up to 25 percent of your retirement income and 15 percent of your social security benefits.
4. IRS must follow the proper procedure before the actual levy happens.
The agency cannot seize your retirement funds directly. They must follow a specific procedure before a levy. This process involves multiple notices and warnings before any actual seizure occurs.
First, the IRS must assess your taxes and then send you a demand for payment. If you can’t pay your tax bill by the due date, they can send you a notice of final intent to levy. During this time, you will have 30 days to settle your overdue taxes or file an appeal.
If you don’t contest, the agency could proceed with the levy. They will seize your funds to compensate for what you owe them.
5. You can make arrangements with the IRS to stop the levy.
If you receive a letter from the government informing you of their intent to seize your asset, you can do two things to stop the levy. You either settle your debt or file an appeal with the IRS. If you don’t have any means to pay your outstanding debt in full, the IRS has several relief options in place. You may be able to pay your tax liability in manageable monthly payments through an Installment agreement. Or, you may pay an amount lower than what you originally owe through an offer in compromise.
If you’re concerned about the IRS garnishing your pension benefits, taking prompt action is important. Whether you want to negotiate a settlement for back taxes or file an appeal, getting help from an expert is always a safe thing to do. They have broad knowledge and experience in resolving complicated tax issues with the IRS, including stopping and releasing a levy.
Additionally, they can help you save time and stress in dealing with the IRS, allowing you to do the things that matter more in life. Ultimately, they can provide you with peace of mind, helping you sleep better at night.
If you have back taxes and need assistance negotiating a payment plan or releasing a levy, call us at Peace of Mind Tax Help at 775-245-4357 for a free 15-minute, no-obligation consultation meeting. We can assess your tax situation and help you find the best resolution tailored for you.