Bankruptcy and Retirement Accounts:

If the debtor can access the funds in a retirement account, so can the IRS. Unless the account is listed as exempt (§6334), the fiduciary of the account will yield to an account collection by the IRS.

If the lien is against an exempt asset, such as a retirement account, the IRS can and will pursue the lien for the remainder of the tax liability not paid off in the bankruptcy. This will remain attached until the taxpayer can access the funds or the CSED runs out unless the debt is settled prior to that time. (I.R.M. 5.11.6.2)

The IRS will not usually levy a retirement account unless the taxpayer meets the definition of “flagrant conduct” in their dealings with the IRS and there is access to the funds before the CSED. Agents are cautioned in their delegation of authority to use discretion. (I.R.M. 1.2.44.4)

Flagrant conduct includes making voluntary contributions to the account while unpaid taxed are accruing, a history of severe employment tax issues, uncooperative or unresponsive behavior, failure to meet established deadlines, or continuing accrual of the TRFP.

The IRS rarely pursues relief from a stay for bankruptcy, however, this does not apply to criminal proceedings, the continuation of audit procedures, the issuance of the Statutory Notice of Deficiency (though it does stay the tax Court response and proceeding SOLs), the demand for tax returns to be filed and the assessment of taxes.

Some Examples from the I.R.M. Of Retirement Fund Levies:

The taxpayer may be able to withdraw money in a lump sum from a plan. If the taxpayer has the right to do so, a levy can reach that right. However, remember that a levy only reaches the taxpayer’s present rights. (I.R.M. 5.11.6.2.8)

Example:
The taxpayer has $10,000 in a plan but can only withdraw it later. The taxpayer may have a present right to the money, although it can not be withdrawn immediately. A levy may reach that right, but the money can be not paid over until the taxpayer can withdraw it. At that time, there may be $30,000 in the plan. Without a new levy only $10,000 could be paid over.

Example:
The taxpayer has money in a plan. The terms of the plan do not allow for any lump sum withdrawal. The plan provides a right in the future to receive monthly payments, but the taxpayer has not paid into it long enough yet to qualify for any future payments. A notice of levy attaches nothing, because the taxpayer has no present property rights.

Our last part of this series tomorrow will cover the bankruptcy petition and other solutions for the taxpayer as well as a list of great articles and links for further research.

In accordance with Circular 230 Disclosure