What accounts can the IRS not touch?
The Internal Revenue Service (IRS) is a powerful entity with broad authority to collect taxes and enforce tax laws in the United States. However, there are certain types of accounts and assets that the IRS cannot easily touch or seize, either due to legal protections, specific exemptions, or practical limitations. Understanding these limitations is crucial for individuals seeking to protect their assets while remaining compliant with tax laws. Below is a detailed exploration of the accounts and assets that are generally beyond the reach of the IRS.
1. Retirement Accounts (Under Certain Conditions)
Retirement accounts are among the most well-protected assets from IRS seizure, but the level of protection depends on the type of account and the circumstances.
-
401(k) and Employer-Sponsored Plans: Funds in a 401(k) or similar employer-sponsored retirement plan are generally protected from IRS levies as long as they remain in the account. This protection is provided under the Employee Retirement Income Security Act (ERISA), which shields these accounts from creditors, including the IRS, in most cases.
-
IRAs (Individual Retirement Accounts): Traditional and Roth IRAs also enjoy some protection from IRS levies, but the level of protection is not as robust as with ERISA-covered plans. Under federal law, up to $1,362,800 (as of 2023, adjusted for inflation) in an IRA is protected from creditors in bankruptcy proceedings. However, the IRS can still levy an IRA for unpaid taxes, though this is relatively rare and typically requires a court order.
-
Pensions: Similar to 401(k) plans, pensions are often protected under ERISA, making them difficult for the IRS to seize.
2. Certain Life Insurance Policies
Life insurance policies can offer some protection from the IRS, depending on their structure and the state in which you reside.
-
Cash Value Life Insurance: The cash value of a life insurance policy is generally protected from creditors, including the IRS, in many states. However, if the policy is surrendered or the cash value is withdrawn, those funds may become accessible to the IRS.
-
Death Benefits: Proceeds from a life insurance policy paid to a beneficiary are typically not subject to IRS levies, as they are considered the property of the beneficiary, not the deceased policyholder.
3. Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs)
Funds held in Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) are generally protected from IRS levies, as long as the funds are used for qualified medical expenses. These accounts are designed to help individuals save for healthcare costs, and the IRS recognizes their importance by limiting its ability to seize these funds.
4. Social Security Benefits
Social Security benefits are partially protected from IRS levies. While the IRS can garnish a portion of Social Security payments to satisfy unpaid taxes, there are limits to how much can be taken. For example, the IRS cannot take more than 15% of your Social Security benefits, and the first $750 of your monthly benefit is generally protected.
5. Child Support and Alimony Payments
Funds designated for child support or alimony are typically protected from IRS levies. The IRS recognizes that these payments are essential for the well-being of dependents and generally does not interfere with them.
6. Certain Trusts
Trusts can provide significant asset protection, but the level of protection depends on the type of trust and how it is structured.
-
Spendthrift Trusts: These trusts are designed to protect assets from creditors, including the IRS, as long as the beneficiary does not have direct control over the trust assets. However, if the IRS can prove that the trust was created to evade taxes, it may be able to access the assets.
-
Irrevocable Trusts: Assets placed in an irrevocable trust are generally beyond the reach of the IRS, as the grantor no longer owns or controls the assets. However, the IRS may challenge the trust if it believes the transfer was made to avoid tax obligations.
7. Homestead Exemptions
In many states, a portion of the equity in your primary residence is protected from creditors, including the IRS, under homestead exemption laws. The amount of protection varies by state, with some states offering unlimited protection for primary residences. However, the IRS can place a lien on your home, which would need to be satisfied if you sell or refinance the property.
8. Certain Personal Property
The IRS is limited in its ability to seize certain types of personal property, particularly items that are necessary for daily living or work.
-
Clothing and Household Goods: The IRS generally cannot seize clothing, furniture, or other household items up to a certain value.
-
Tools of the Trade: Items necessary for your profession or trade, such as tools, equipment, or books, are often protected from IRS levies.
9. Assets Held in Tenancy by the Entirety
In states that recognize tenancy by the entirety, property owned jointly by a married couple is protected from creditors of either spouse, including the IRS. This protection applies as long as both spouses are alive and the property is not used to commit fraud or evade taxes.
10. Foreign Accounts (With Limitations)
While the IRS has broad authority to tax worldwide income, it faces practical and legal challenges when attempting to seize assets held in foreign accounts. However, failing to report foreign accounts can result in significant penalties, so it is essential to comply with reporting requirements such as the Foreign Bank Account Report (FBAR).
11. Certain Court-Ordered Restitution or Settlements
Funds awarded as part of a court-ordered restitution or settlement, particularly those related to personal injury claims, are often protected from IRS levies. This is because these funds are intended to compensate the recipient for specific losses or damages.
12. Assets in Bankruptcy Proceedings
Filing for bankruptcy can provide temporary or permanent protection from IRS levies, depending on the type of bankruptcy and the nature of the tax debt. For example, certain tax debts may be discharged in a Chapter 7 bankruptcy, while a Chapter 13 bankruptcy can create a repayment plan that stops IRS collection actions.
13. Assets Protected by State Laws
State laws can provide additional protections for certain types of accounts and assets. For example, some states offer exemptions for wages, retirement accounts, and personal property that exceed federal protections. It is important to consult with a tax professional or attorney familiar with your state's laws to understand the full scope of protection available.
14. Assets Transferred to a Spouse or Family Member
Transferring assets to a spouse or family member does not necessarily protect them from the IRS. The IRS can pursue assets that have been transferred in an attempt to evade taxes, particularly if the transfer was made after a tax liability arose. However, legitimate transfers, such as those made as part of estate planning, may be protected.
15. Assets in Certain Non-Profit or Religious Organizations
Assets held by legitimate non-profit or religious organizations are generally protected from IRS levies, as long as the organization is in compliance with tax laws and regulations. However, the IRS can investigate and take action if it believes the organization is being used to shield assets from taxation.
Conclusion
While the IRS has extensive powers to collect unpaid taxes, there are several types of accounts and assets that are either fully or partially protected from IRS levies. These protections are often rooted in federal or state laws designed to safeguard essential assets, such as retirement savings, primary residences, and personal property. However, it is important to note that attempting to hide assets or evade taxes can lead to severe penalties, including criminal charges. If you are facing IRS collection actions, it is advisable to consult with a tax attorney or financial advisor to explore your options and ensure compliance with tax laws.
By understanding the limits of the IRS's authority, individuals can take proactive steps to protect their assets while fulfilling their tax obligations.