Can the IRS Seize IRA Funds?
Your IRA protects you from paying income taxes on your retirement savings. Your IRA is also protected from most lawsuits and judgments up to $1 million. However, your IRA is not protected from the IRS. The IRS may take actions against you to satisfy debts you owe to the U.S. government. \
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Process
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The IRS may place a federal tax lien on your IRA to collect a tax debt you owe. The agency then sends a notice of intent to levy. Finally, the IRS levies your IRA account. Normally, this process is done as a last resort. However, it is an option that the IRS may use in order to collect any back taxes that you owe.
Significance
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If the IRS seizes your IRA, you lose some or all of your IRA savings. Your IRA account is not closed. You may still contribute to the account. The IRS normally places a hold on the account, however. Any money inside of the account at the time of the seizure will be taken. You generally have 30 days from the notice of intent to levy to make payment arrangements.
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Effects
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The IRS will only take enough of your money to satisfy the tax liability that you owe. There is no 10 percent penalty for early withdrawals when the IRS takes your money. There is also no additional income tax due on the money that is taken from your IRA account to satisfy the tax debt.
Prevention/Solution
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Before the IRS seizes your IRA, you have an opportunity to negotiate with the IRS. The IRS may set up payment arrangements with you if you contact them prior to the levy. You may also be able to set up an Offer in Compromise. IRS form 656 is an Offer in Compromise. This is a settlement of your tax debt. You pay less than the full amount of your tax liability if the offer is accepted. Generally, the IRS will accept an Offer if the agency determines that collection of the tax debt is unlikely or that the Offer is the most efficient way to collect the debt.
Considerations
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Before negotiating with the IRS, consider contacting a tax specialist. A tax attorney, for example, will be more familiar with IRS rules and regulations that you will be. The specialist will know how to communicate with the IRS and how best to save your IRA from being seized.
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