If the IRS liability is a JOINT liability then YES, the IRS may levy both your and your spouse’s wages, assets, and/or accounts. When it comes to wages, IRS guidelines suggest that only the spouse with the higher income should be levied (a wage levy is the IRS term for a wage garnishment). But, in cases where the taxpayer is refusing to pay, the instruction is to levy both spouses’ wages. Keep in mind that a portion of wages will be exempt from levy, so the IRS can’t take all of your or your spouse’s wages. Social Security income can be levied too.
If the IRS liability is yours alone, and you do not fall under the laws of a community property state, then it is a SEPARATE liability and the IRS may NOT levy your non-liable spouse’s wages, assets, or bank accounts. However, if you live in a community property state it does not matter that your liability is separate, meaning that your spouse’s wages, assets, and bank accounts can be levied. See below for more details on this important exception. Also note that the IRS must comply with a series of procedures before it can levy wages, bank accounts, and other assets.
IRC 6331 Joint Bank Account Levies
If you have a joint bank account with your spouse, then YES, that account can be levied even though the IRS liability is separate and your spouse is not liable. If you have a joint account with anyone else for that matter, the funds in that account can be levied. The IRS can take funds from an account if your name is attached to it as if it all belonged to you. This applies to joint retirement accounts or savings accounts and safety deposit boxes. If your name is on it, the IRS can take it.
The IRS can usually find accounts with your name on them because all banking institutions have to share account information with the IRS. The Internal Revenue Code Section 6331 gives the IRS the authority to levy your accounts and the Supreme Court in 1985 held that this collection remedy gives the IRS the authority to determine the rights of the innocent third party involved. Ouch!
Recommendation: if the IRS is in a position to levy you, and your spouse is not liable for the tax debt, do not deposit your spouse’s (or a third party’s) funds into your accounts. Better yet, resolve the tax liability prior to enforcement so that neither of you gets levied.
IRS Collection In Community Property States
In community property states, your spouse’s wages and bank accounts can be levied even though your spouse is not liable, and even if you keep separate bank accounts. There are nine community property states listed below. Some states allow 50% of your spouse’s property to be community property while other states allow for 100% of your spouse’s property to be community property. So, depending on what your state allows, the IRS may be able to collect from a spouse either 50% or 100% of the community property even if that spouse is not liable.
If you live in a community property state, it provides property rights in your spouse’s property creating “community property” from which your creditors, like the IRS, can collect. Therefore, the IRS can levy your spouse’s wages and bank accounts even though your spouse is not liable.
Community Property states are:
- California 100%
- Idaho 100%
- Louisiana 100%
- Arizona 50% (With some variation)
- Nevada 50%
- New Mexico 50%
- Texas 50% (With some variation)
- Washington 50%
- Wisconsin 50% (With some variation)
For example, if you live in California and your non-liable spouse has $1000 in a separate bank account, it can all be levied. But, if you live in Arizona, only 50% of that $1000, or $500, is subject to levy.
In California, the IRS can calculate a wage levy against your non-liable spouse based on 100% of his or her wages. In Arizona, the IRS would calculate a wage levy based on only 50% of your non-liable spouse’s wages. Remember, the IRS wage levy exemption prohibits them from taking 100% of your or your spouse’s take home pay.
A levy against your wages is typically continuous; that is, one levy against your wages will continue to take the non-exempt portion of your wages until the liability is paid or you get them to stop the levy. A levy against your non-liable spouse, however, is not continuous. So the IRS would have to issue a separate levy each time it wishes to take your non-liable spouse’s wages.
The IRS can levy your non-liable spouse’s separate bank accounts, IRA or 401(k) if it believes the funds in those accounts are community property. For example, if you live in a community property state where 100% of your spouse’s earnings are community property, then your spouse’s 401(k) can be levied at 100% to satisfy your liability. It will be up to you or your spouse to prove to the IRS that the funds in the 401(k) were not community property.
If you have a pre-marital agreement opting out of the community property of the spouse which you entered into before the tax liability was incurred (or could reasonably be anticipated), then your non-liable spouse’s property would be considered separate and unreachable by the IRS. However, the IRS may be unaware of the pre-marital agreement, in which case it could proceed with enforcement against your spouse, leaving you with the task of proving, after the fact, that the levied assets are not community property.
Your non-liable spouse will get a copy of the levy notice sent to the bank or employer. Both you and your spouse have the right to appeal the levy under the IRS Collection Appeal Program.
It is well understood that debt, in general, and IRS tax debt in particular, is stressful on a marriage. In a community property state, the consequences of your tax debt on your marriage can be especially devastating. Imagine you live in California. Before you get married, you were happy go lucky and forgot to file (and pay) a few tax returns. Five years later, you’re married, and out of the blue, the IRS starts levying your spouse’s wages. Your spouse had nothing to do with your past tax debt, but now he or she is involuntarily paying it off with his or her wages. No matter how kind and understanding of a spouse you have, he or she is probably not going to be happy about this. You would be well served to resolve your back tax liability before it gets to this stage.
Enforcement, such as wage and bank account levies, does not happen immediately after a tax liability comes into existence. There is a process of collection that builds up to enforcement, so it does not have to come to that. If your situation is handled properly, you should be able to avoid enforcement from the IRS in most cases. Seek advice from a tax professional, particularly if you incur a tax debt which you are unable to pay in full promptly. ATABS is here to help!