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Updated: Jan 23, 2023

How the IRS Collects Taxes You Owe


If you thought debt collectors were pesky, the wrath of the Internal Revenue Service (IRS) is far worse. The government agency can wield powers that ensure taxpayers pay their taxes or take it by force if the need arises.

MyBankTracker reader Michelle asked the question: “If you owe money (most of it from interest accumulated from non-payment of taxes), will the IRS take the money you owe out of a newly opened checking or savings account?” It is in the best interest of taxpayers to pay their taxes as soon as possible. The IRS is somewhat flexible if you prove to be in financial hardship by offering a monthly installment agreement or settling the tax liability with a payment of a reduced amount.

Otherwise, continued non-payment of past due taxes may trigger a more aggressive tax collection approach by the IRS.

There are three actions the IRS can take to collect taxes:

  • Filing a Notice of Federal Tax Lien
  • Serving a Notice of Levy
  • Offsetting Future Tax Refunds

Filing a Notice of Federal Tax Lien

A federal tax lien is a legal claim imposed upon your property and any future property you will acquire. The federal tax lien is automatically issued when you fail to pay taxes owed within 10 days after the IRS sends their first bill.

The Notice of Federal Tax Lien may show up in your public records such as your credit report, which will show up as a delinquency and negatively affect your credit score calculations. Generally, the lien will not be lifted until the IRS receives payment in full for taxes, penalties, interest, and recording fees or unless the IRS may longer legally collect the tax.

Serving a Notice of Levy

A Notice of Levy signals that the IRS intends on levying your assets such as bank and individual retirement accounts, wages, Social Security benefits, and retirement income. Even more frightening, the IRS can seize your property, such as your car and real estate, and sell them to recoup the taxes you owe.

Any asset tied to your Social Security number that is reported to the IRS, including future assets, are susceptible to levy. The IRS will typically become alerted of your assets around the end of the year when financial institutions send out tax documents to taxpayers and the IRS. The IRS cannot levy a financial account that it doesn’t know exists.

Offsetting Your Future Tax Refunds

If you hold a balance with the IRS over a number of years, the IRS will pursue past taxes and interest by offsetting your future tax refunds. It means that you will be using your future tax refunds to pay for the past taxes due. Additionally, your state income tax refunds are within the confines of IRS jurisdiction so the agency can collect taxes on those as well.

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