Can the IRS Levy my Social Security Income and 401k?


There are certain income streams and assets that are protected from creditors and their collection activity. Things like income from Social Security or your ERISA (Employee Retirement Income Security Act) qualified retirement accounts are normally exempt from collection activity. However, you need to be careful because there is an exception for the Internal Revenue Service (IRS).

Once the IRS files a lien against you they can do what most creditors can do: garnish your wages, levy bank accounts, or place liens against any of your property. If that is not enough to cover the debt owed to the IRS the IRS can then go ahead and levy your federal payments (up to 15%) such as Social Security benefits and benefits that are administered by the Office of Personnel Management. The IRS will cannot levy income from unemployment benefits, special pensions for Medal of Honor winners, workers compensation, certain public assistance payments, and court-ordered child support payments. This is not a comprehensive list. For more information on what can or cannot be levied you can view IRS Publication 594 and other forms and publications from the IRS website.

In addition to being able to levy your federal income payments the IRS can also levy against your income received from pensions and retirement plans such as 401ks, Stock Bonus Plans, Profit Sharing, IRAs, SEP-IRAs and Keogh Plans. The important thing to note is that the IRS stands in your shoes. They can only receive what you would be able to receive at the time of the levy. If you cannot withdraw any funds from the retirement account until you retire the IRS cannot levy those funds until you retire. If you can withdraw funds from your retirement account like a 401k but will be penalized 10% for the early withdrawal the IRS gives you a break. They will levy your 401k but they will not tax you for the 10% early withdrawal. Sometimes people find that that is an easier way to get the IRS off their back and request that the IRS do so. Of course that would still sting and would set you back quite a bit on your 401k, but it may be a better solution than having the IRS constantly after you and accruing interest and penalties at the same time.

You can of course dispute the levy with the IRS if you believe you do not owe the amount the IRS says you owe. If it is determined that you actually owe the amount you can try to do an Offer in Compromise or do an Installment Agreement. Additionally, before the IRS decides to levy on your retirement assets they have to determine if you depend on the retirement account for necessary living expenses. If you can prove to them you need all of your retirement income to live each month they may hold off on levying your retirement assets.

Another alternative is to file for bankruptcy. Contact a bankruptcy lawyer in your area to see the bankruptcy can help. If your tax debt is more than three years old, filed more than two years ago, assessed more than 240 days ago and not filed fraudulently, your tax debts may be dischargeable in bankruptcy. The key is to try to file your bankruptcy case BEFORE there is a lien on your property. If you file your bankruptcy case after there is a lien on your property the IRS may still be entitled to the retirement assets you had at the time you filed for bankruptcy. They cannot attach to any after-acquired property but they can still get to your retirement account, especially if you will be retiring soon and will be able to access your retirement funds. You should contact an experienced CPA or bankruptcy attorney if you believe you will be receiving a notice from the IRS that they will be filing a lien against you soon. Do not ignore the IRS.