IRS Audit Red Flags: Understand Who & When the IRS Audits

On average, the IRS audits about 0.5% of all filed tax returns, but audit stats vary widely depending on the type of return filed, the amount of income reported, and other red flags. If you're curious about your chances of being audited, the stats will only take you so far — you need to be aware of the red flags that may be showing up on your tax return.

IRS red flags are another name for the Discriminant Function System (DIF) used by the IRS to generate a tax return score. The higher the DIF score, the more likely the tax return will be audited. While it is not known exactly how the IRS computer system works, many tax professionals know which factors the IRS weighs more than others. The IRS uses three different computer systems to check for different red flags.

Some red flags don’t always lead to an audit. They are all considered by the computer program and weighted together to determine if the return should be audited. Pretty much what the computers do is a complex statistical analysis of each tax return, and if the return falls outside of statistical norms, then it will likely be flagged. Most of the time, when the IRS computer has flagged a return, it will be manually reviewed by an IRS employee to determine if the return should be audited.

Individuals and small businesses have different red flags because of the difference in the nature of both. Below are the most common individual tax return red flags and small business tax return red flags.

Former IRS Agent Explains Red Flags That Can Trigger an IRS Audit

Individual Tax Return Red Flags

These are the most common red flags for personal tax returns.

1. Rounded numbers: The likelihood of your investment earnings or your mortgage interest being a rounded number is very unlikely. The IRS knows that if numbers are rounded, there is a higher chance that the person filling out the tax return is not using actual numbers. Don’t panic if you do see that your investments actually came out to a straight $1,000.00. Normally a flag won’t be triggered unless there are a few instances of rounded numbers.
2. Unreported income: The IRS will catch this through their matching process if you fail to report income. It is required that third parties report taxpayer income to the IRS, such as employers, banks, and brokerage firms. If the IRS notices that a third party reported that they paid you income, but you don’t have that income reported on your return, this immediately raises a red flag.
3. Sloppy or incomplete information: One of the biggest red flags is if the tax return has math errors or is incomplete. It is always smart to use tax software that checks everything electronically. These can be some of the easiest errors to avoid.
4. Charitable donations: Charitable donations are great, but the IRS has found that many abuse this deduction. This is why the IRS will look into many large charitable donations. The IRS knows what the average charitable donation amount is for someone of your income bracket, and if you donate more than the average this will raise a red flag. If you are a generous person, just be sure to keep all records of the transactions to prove to the IRS if they ask.
5. Earning over 100K: The IRS likes to focus its efforts on individuals so that they can justify the expense of the audit. Individuals making over $100,000 are 500% more likely to get audited than those making under that. This is one of those flags that you cannot help. It is just a fact that the IRS audits people with higher incomes at a much higher rate.
6. Low-income profession: On average, the IRS computer knows what someone of your profession and location makes. If you report a number significantly lower than the IRS would expect, that could be a red flag. If you get audited for this reason and reported everything correctly, then it is probably time for you to request a raise.
7. Differences in Federal and State tax returns: If there are differences in what is reported on each of these, you can expect red flags to go up for the IRS and for the State. Be sure these are consistent. Using tax preparation software can help with this, and make sure there are no differences when you file.
8. Large swings in income: The IRS thinks there should be consistency in earnings. This is a red flag if there are large swings of reported income that cannot be explained by W-2s or 1099’s. This is another one of those red flags you can’t avoid if you have large swings in income. If you expect large swings, just be prepared to show documentation for the differences.
9. Job Expenses: Most people cannot take job expense deductions if they are W-2 employees. There are cases where this is allowed if certain conditions are met. The IRS knows that not many people meet these conditions, and far more people take the deduction than qualify to take it. Therefore, it is a red flag to take job expense deductions if you are a W-2 employee.
10. Tax avoidance transactions: Sometimes, incriminating documents are turned over to the IRS from the IRS’s efforts to identify participants in tax avoidance transactions. This can happen when the IRS gets the courts to get companies that are promoters of tax avoidance schemes to hand over documents related to these transactions. These transactions can point out individuals that have taken part in tax avoidance transactions.

Small Business/Self-Employed Tax Return Red Flags

These are the most common red flags for small business/self-employed tax returns.

1. Home Office Deductions: Since the IRS has allowed home office deductions, they have been abused. There are many cases where these are legitimate deductions, but people often overstate them or misuse them, which is why the IRS investigates these types of deductions more than any other. Typically, the IRS will look at your profession and prior tax filings to determine how much weight to put on this red flag. If you are taking a home office deduction and it is legitimate, be sure to have the proper backup to support it if any questions arise.
2. Filing a Schedule C: Studies have shown that people who file a Schedule C are much more likely to get audited than those who don’t. If you do file a schedule C, be sure to have all the documentation to back up the deductions that you have taken. You can also consider forming a separate business entity (LLC, S Corp, Corporation) and flowing expenses through there instead of a Schedule C.
3. Entertainment deductions: This deduction has been abused quite a bit in the past. Many people put too many entertainment or business meal expenses on the business when most are not allowed. This will raise a red flag if the amount charged seems too large compared to the business size.
4. Losses reported from hobby instead of business venture: The tax code does not permit individuals to deduct hobby expenses on their tax return. If you have claimed expenses on a Schedule C that show a loss, the IRS may look into this further because it looks like you could be flowing through hobby losses as a business loss. The IRS will require you to prove that this is a legitimate business if they audit you for this reason.
5. Low Income with large deductions: Many times, when small businesses report low income and large deductions, they tend to be claiming more than is actually allowed. While this could be legitimate, especially for newly formed companies or companies with not-so-great years, the IRS may look into this further.
6. Claiming a loss on the business: Claiming a loss on a business is a red flag right away because this means that no taxes will be paid on the business, and the IRS thinks that you may take deductions that are not allowed in order to pay any taxes. As you can see, there is a common theme with red flags and small businesses.

If your tax return has audit red flags, it doesn’t mean that you have done something wrong. Your return is often perfectly fine, but statistically speaking, from the IRS perspective, it is in their best interest to investigate a bit further. Being aware of common IRS audit red flags can help you ensure you keep proper documentation on items the IRS considers flags.

Is filing late a red flag to the IRS?

Not necessarily. A late return doesn't increase your audit risk, according to most tax professionals, but consistently filing returns late, especially business returns, can put you on the IRS's radar. If you have unfiled returns, not filing them can lead to a risk of penalties, interest, and/or incorrect tax assessments. In most cases, it's better to come forward proactively, file the back taxes, and make payment arrangements with the IRS. The idea that filing late will trigger an audit is a myth.

Luckily, you don't have to worry too much about whether or not the IRS is going to audit your tax return. If they decide to do that, they'll send you an audit letter and communicate with you along the way. To ensure you don't miss anything, keep your address updated with the IRS. 

If you are looking for a licensed tax professional to help with a tax audit, review this list of tax professionals who have experience resolving IRS audits or start a search below and click "audit or examination" using the filter on the search page called "IRS Problem Experience." If you're dealing with an audit, you can hire an IRS audit attorney, a CPA, or an enrolled agent.

IRS Failure to File Penalty: Penalties for Not Filing a Tax Return

The IRS has harsh penalties and consequences for taxpayers that don’t file their tax returns. Some people don’t file their tax returns because they are confused about whether or not they need to file a return. Others end up not filing because they don’t have the money to pay. That is the worst thing you can do — the failure-to-file penalty is significantly higher than the failure-to-pay penalty. You also have more options once you obtain filing compliance, as many IRS programs require federal filing compliance.

To help you understand what happens if you file late, this post breaks down the failure-to-file penalty, including how it’s calculated, when it applies, and how to get it removed.

Key Takeaways

• IRS Penalties for Not Filing: The IRS imposes harsh penalties on taxpayers who fail to file. The more compliant you are, the more resolution options you’ll have.
• When a Tax Return is Considered Filed: The IRS uses the date it is physically received at the designated filing location. The “Beard Test” is applied to confirm the document qualifies as a valid return.
• Beard Test Criteria: The return must contain sufficient data to calculate tax liability, identify itself as a return, be signed under penalties of perjury, and represent an honest and reasonable attempt to satisfy tax law.
• Failure-to-File Penalty: Assessed starting the first day a return is late — typically 5% of tax owed per month, up to 25%. An extension prevents this penalty but not the failure-to-pay penalty.
• Penalties Vary by Entity Type: Different rules apply to individuals, corporations, partnerships, S corporations, and tax-exempt organizations.
• Removing the Penalty: Penalty abatement is available through First Time Abatement (FTA) or by demonstrating reasonable cause. Filing any outstanding returns is essential to stop penalties from growing.
• Compliance Is Key: Being forthcoming and getting into compliance as quickly as possible gives you the best shot at minimizing penalties.

When the IRS Considers a Tax Return Filed

The IRS considers a tax return filed “on the date that is received at the place designated for filing by the Service.” It must first determine whether the document constitutes a valid return. The IRS applies the “Beard Test” to make this determination. If identity theft occurred and the IRS flags the return as an ID Theft return, it can override the received date in their system.

One way to confirm your return’s filed date is to review your Account Transcript for code 150. It will show a return due date and a return received date — the later of the two is typically the official filed date. Exceptions apply in certain circumstances.

Criteria the IRS Uses to Establish the Filing Date

The IRS establishes the filing date (see IRM 25.6.1.6.14) after applying the following IRC rules:

• There must be sufficient data to calculate the tax liability shown on the return, including supporting schedules or forms
• The document must identify itself as a return (name, address, TIN)
• An honest and reasonable attempt must be made to satisfy the requirements of the tax law
• The return must be signed under penalties of perjury — without the signature, the Statute of Limitations on Assessment (ASED) and the Statute of Limitations on Collections does not start
• There was no identity theft (Employment-Related or Tax-Related)

See “Beard v. Commissioner 82 T.C. 766, 744 (1984), aff’d 793 F.2d 139 (6th Cir. 1986)”

When the IRS Charges the Failure-to-File Penalty

The IRS assesses the failure-to-file penalty (FTF) on the very first day your tax return is considered late. For most years, federal income tax returns are due on April 15th — the penalty begins accruing on April 16th. If that date falls on a weekend or holiday, taxpayers are given until the next business day.

Extension Requests

You can request a six-month extension, which moves the deadline to October 15th and prevents the failure-to-file penalty as long as you file by that date. However, an extension does not eliminate the failure-to-pay penalty (FTP) — you still must pay at least 90% of taxes owed by April 15th (or 100% of what you paid last year) to avoid it. The FTP penalty is a fraction of the failure-to-file penalty.

The failure-to-file penalty only applies if you actually owe taxes. If you have no tax liability, you avoid this particular penalty — though other consequences for not filing may still apply.

Standard Failure-to-File Penalty

The failure-to-file penalty is 5% of your unpaid tax balance per month. For example, on a $5,000 balance that is $250 per month. The penalty is assessed starting the first day the return is late and continues each month until you file — up to a maximum of 25% of the outstanding balance.

How the FTF and FTP Interact

When both the failure-to-file and failure-to-pay penalties apply in the same month, the combined penalty is capped at 5% (4.5% FTF + 0.5% FTP). In other words, the FTF is reduced by the FTP amount so you are not double-penalized.

If you file at least 60 days late, the IRS also charges a minimum penalty — the lesser of $450 or 100% of the tax due.

Failure-to-File Penalty When Negligence or Fraud Is Involved

If you failed to file in an attempt to commit tax fraud, or you filed a false return, the penalties are dramatically higher. The IRS triples the punishment: the monthly penalty becomes 15% and the maximum penalty rises to 75% of the total taxes owed. Criminal charges and jail time are also possible.

Taxpayers who claim filing is voluntary and assert tax protestor positions may face a Frivolous Tax Return Penalty of $5,000 (or $10,000 if married filing jointly).

Failure-to-File Penalty for Tax-Exempt Organizations

Tax-exempt organizations that fail to file required information returns are generally penalized $20 per day late. The maximum penalty is the smaller of $10,000 or 5% of the organization’s gross receipts for the year.

For organizations with gross receipts exceeding $1 million, the daily penalty increases to $100 per day, up to a maximum of $50,000. Additionally, an organization that fails to file three years in a row automatically loses its tax-exempt status.

Failure-to-File Penalty for Partnerships & S Corporations

S corporations and partnerships must file their annual return by the 15th day of the third month following the end of their tax year. Failure to file results in a penalty of $195 per partner or shareholder per month, for up to 12 months.

For example, a partnership with 4 partners that files 3 months late would owe: 3 months × 4 partners × $195 = $2,340. Additional penalties may apply if the partnership also fails to furnish Schedule K-1s to its partners.

Failure-to-File Penalty for Corporations

The FTF penalty for corporations filing Form 1120 or 1120-A late mirrors the standard individual penalty: 5% of any unpaid tax per month, up to a maximum of 25%.

The same rule applies to Form 941 (Employer’s Quarterly Tax Return) and Form 940 (Employer’s Annual Federal Unemployment Tax Return) — 5% per month on any unpaid balance, up to 25%.

Removing the Failure-to-File Penalty

If you have not filed late in the past three tax years, you may qualify for the First Time Abatement (FTA) program. As of 2026, the IRS plans to apply this abatement automatically to qualifying taxpayers. In other cases, penalty abatement is available by demonstrating a reasonable cause that prevented timely filing.

Filing any outstanding returns as soon as possible is critical — it stops the penalty from continuing to grow. Even if you cannot pay, the failure-to-pay penalty is far smaller than the failure-to-file penalty.

Common Situations That May Qualify for Penalty Relief

• You mailed your return but the post office returned it due to insufficient postage
• Destruction of records or your place of business (fire, hurricane, natural disaster)
• An IRS employee provided incorrect guidance (rarely accepted)
• Death or grave illness of a family member (for a corporation, the affected person must have had sole filing authority)

If you have unfiled back taxes or outstanding failure-to-file penalties, consider consulting with a tax relief professional who can help you get into compliance and pursue abatement.

Penalty Examples by Organization Type

The table below compares how the failure-to-file (FTF) and failure-to-pay (FTP) penalties add up across different entity types, assuming a $5,000 unpaid tax balance filed 3 months late.

IRS Failure-to-File Resources

• Failure to File Penalty | IRS — Overview of the penalty, rates, and conditions for assessment.
• Penalties | IRS — General overview of IRS penalties including FTF and FTP.
• Failure to Pay Penalty | IRS — How the FTP penalty is calculated and how it interacts with the FTF penalty.
• Penalty Relief | IRS — Types of relief available, including First Time Abate and administrative waivers.
• IRS Notices, Penalties, and Interest | IRS — What to do when you receive a penalty notice.
• First Time Abate | IRS — How to qualify for FTA penalty relief.
• What to Do If You Haven’t Filed | IRS — Steps and relief options for unfiled returns.
• Penalty Relief for 2020 and 2021 | IRS — COVID-era relief measures for those tax years.

IRS Failure To Pay Penalty: What to Know

If you don’t pay your taxes on time, in full, or at all, the IRS will assess a failure-to-pay penalty (FTP). Many people in this situation are scared to contact the IRS, or they decide not to file the tax return after finding out what they owe. This is not a good idea. There are serious consequences for unfiled or delinquent tax returns. As of 2026, the IRS will automatically remove failure-to pay penalties for qualifying taxpayers, but if you don't qualify for automatic relief, you should consider reaching out to a tax professional for help. 

Remember, the IRS wants to work with you. If you set up a payment arrangement, the IRS cuts the FTP penalty in half. If you cannot afford a payment plan with the IRS, there are other options to consider.

When Does the IRS Charge the Failure to Pay Penalty?

The IRS assesses the failure-to-pay penalty anytime you pay your taxes late. A late payment refers to one that is after the regular due date. Remember, filing an extension, does not extend any payment due date, only the filing one. This penalty applies the very first day your taxes are late (generally after April 15th), and the IRS assesses this penalty monthly up to a maximum of 25% of the total tax owed or until the tax is paid in full.

How Much is the IRS Failure to Pay Penalty?

The FTP penalty ranges between 0.25% to 1% of the unpaid or outstanding tax amount, per month. For example, if you owe $5,000, and your penalty is 1%, that equates to $50 for the month. Ultimately, the total FTP charges can amount to up to 25% of your balance.

The standard FTP penalty is 0.5% a month. If the IRS issues an intent to levy notice and you don’t respond, the penalty increases to 1% after ten days. If you enter into an installment agreement, this IRS tax penalty falls to 0.25% a month.

What’s the Difference Between the Failure-to-Pay and the Failure-to-File Penalty?

If you do not file your taxes, the IRS charges a failure-to-file penalty (FTF). The FTF penalty is 5% of your balance per month up to a max of 25% of your unpaid taxes. The IRS reduces the failure-to-file penalty in any month where the failure-to-pay penalty applies. Five percent is the maximum amount the IRS charges when these two penalties occur in the same month. However, if fraud is involved, the penalties are higher.

How Is the FTP Different From an Underpayment Penalty?

The IRS assesses the FTP penalty when taxes assessed remain unpaid after the payment due date. Generally, when you hear the term, “underpayment penalty,” this refers to taxpayers who failed to make estimated tax payments or didn’t pay enough in estimated taxes throughout the year. The IRS requires taxpayers who do not have sufficient withholdings throughout the year to make estimated tax payments or face an underpayment penalty. You can avoid the underpayment penalty if:

• You owe the IRS $1000 or less after subtracting estimated tax payments and/or withholdings you had during the year
• If the IRS has 90% of what you owe for the current year, or 100% of what you owed for the previous year, whichever is smaller
• Note: The 100% in the former rule becomes 110% if your adjusted gross income is $150,000 or more ($75,000 if married filing separately)

What Is the Interest on Unpaid or Underpaid Taxes?

In addition to penalties, the IRS assesses interest on all unpaid taxes owed. The interest rate can change every three months, and it is the federal short-term rate plus an additional 3%.  As of 2017, the federal short-term rate fluctuated between 0.98 and 1.29%. That makes the interest rate on unpaid taxes between 3.98 and 4.29%, but it can be higher than that in some years. You can find the Applicable Federal Rates here.

The interest on unpaid taxes compounds. That means that once interest and penalties accrue, the interest gets assessed on those amounts as well as on the original tax owed.

Removing the Failure to Pay or Late Payment Penalty

The IRS offers penalty abatement for some taxpayers. In fact, automatic first-time penalty abatement is available for the first year you incur the FTP penalty.  To qualify, you must have paid on time for the past three tax years. If you don't qualify for automatic first-time abatement, you must show the IRS that you had “reasonable cause” to pay late. The IRS accepts a wide range of reasons, and the agency handles each situation on a case-by-case basis. If you would like to read more about this, the IRS offers a publication reviewing penalties.

What If You Can’t Pay the IRS in Full?

If you cannot pay the IRS in full, there are a wide range of solutions for you. Setting up a payment arrangement with the IRS you can afford is one way to avoid enforced collections with the IRS. Furthermore, it also cuts the failure-to-pay penalty in half. If you have financial issues, you can look into obtaining a hardship status from the IRS or apply for an Offer in Compromise. Whatever the case, it is always a good idea to consult with a licensed tax professional. You can find one by going here. 

To avoid owing taxes in the future, figure out why you owed a tax bill for the year you got behind. Then, take steps to avoid this situation with your future years' returns. For example, if you owe taxes because your boss didn't withhold enough from your paycheck, set up a payment plan, but also update your W4 so that your employer withholds more in the future. In contrast, if you ended up with a tax liability for a situation that isn't recurring (for example, you sold some investments), then you don't need to worry about changing anything for future years. 

IRS Taxes and Chapter 7 Bankruptcy Requirements & Details

Chapter 7 applies to individuals who cannot make consistent monthly liability payments regardless if the individual is solvent or insolvent. With a Chapter 7 bankruptcy, you can discharge some taxes, but first, you need to liquidate your non-exempt assets. The definition of non-exempt assets varies from state to state, but generally, you can keep homes with a moderate amount of equity, a vehicle, and your personal belongings. Typically, filing Chapter 7 takes 90 to 180 days, and it costs a few hundred dollars in administrative fees.

Chapter 7 Bankruptcy Requirements to Discharge IRS Income Taxes

The IRS only discharges taxes in bankruptcy if the taxes owed meets certain conditions. If you do not meet these or if you miss a deadline even by a day, the tax may be due at the end of your bankruptcy proceedings. Here are the conditions:

• Only Income Tax — You can only discharge income tax through a Chapter 7 bankruptcy. You cannot usually include payroll taxes, business sales taxes, excise taxes, or other types of taxes.
• At Least Three Years Old — This is the three-year rule. You can only include taxes that are at least three years old. The clock starts on the return due date. That is usually April 15 of every year. If you request an extension, the three-year period begins on the tax-filing extension due date. That is usually October 15.
• Filed at Least Two Years Ago — You must have submitted the tax return associated with the taxes owed at least two years ago. For example, you cannot file an old return from three years ago and include that taxes owed in bankruptcy the following week. In this situation, the tax is old enough, but the filing is too recent.
• Not From a Substitute Return — A substitute return is when the IRS files a return on your behalf. You cannot include taxes from a substitute return in your bankruptcy. You must file the tax return yourself.
• Assessed at Least 240 Days Ago — If the IRS makes changes to your return or adds to your unpaid taxes that is a tax assessment. You can only include assessed taxes if the assessment occurred 240 days ago or more.
• No Fraud or Evasion — If you are convicted of tax evasion or fraud, you cannot include taxes in your bankruptcy.

On top of these requirements above, you must prove to the courts that you have filed the last four years of tax returns. You also need a copy of your most recent tax return. Unfortunately, if you have any tax liens, a Chapter 7 bankruptcy will not get rid of them.

General Requirements to File for Chapter 7

To qualify for Chapter 7, you also have to meet some additional criteria. Here are some of the most important requirements:

• Your current monthly income over the last six months is equal to or below your state’s median income for your family size.
• You take a means test to determine whether or not you have the ability to pay some of your back taxes and liabilities with your disposable income. If you pass the means test, you may need to file Chapter 13. With Chapter 13, you make repayments on your liabilities for a certain amount of time.
• You complete credit counseling with a government-approved nonprofit organization.
• You complete a “Statement of Financial Affairs” form for the courts.
• Provide a copy of your most recent tax return to the bankruptcy court (sometimes they may ask for the last two years).

It is essential that if you file for bankruptcy that you do not incur additional liabilities. In other words, you may need to adjust or make estimated tax payments or adjust IRS withholding, so you do not continue to accrue taxes.

Documents You Need to Provide Bankruptcy Trustee

To prove many of the requirements above, the official appointed to your case (aka bankruptcy trustee) will need documents required by section 521 of the bankruptcy code. Alternatively, you may file them with the court (depends on local practices).  As discussed above, your trustee usually will request these documents (although your trustee’s document demands may be different):

• Copy of your most recent tax return (sometimes the last two years)
• Previous 2 months of bank statements
• Last two months of pay stubs

Other Documents Your Trustee Might Request

Your trustee, in most cases, may request additional documents from you. Therefore, it is in your best interests to have these documents available. Some of these documents include:

• Mortgage statements
• Bank statements past 60 days
• Investment account statements
• Retirement account statements
• Pension account statements
• Car loan statements
• Life insurance statements
• Divorce or marital settlement-related paperwork
• Appraisals of your car, house, or other property
• W-2s, 1099s, receipts for expenses

Discharge At the End of Chapter 7 Bankruptcy 

Once your Chapter 7 bankruptcy comes to a conclusion, you will receive a discharge of your liabilities. In other words, for those liabilities that are dischargeable, you will not be personally liable anymore. In regards to taxes, if you meet the specific rules above, then you will not owe the taxes anymore. However, the circumstances and facts of each case largely determine whether you can discharge your taxes and other liabilities.

Because it has such serious consequences on your credit, you should only pursue bankruptcy as a last resort. Moreover, bankruptcy doesn’t get rid of trust fund penalties or several other types of taxes. Before filing for bankruptcy, make sure to explore all other options. It is recommended you reach out to a tax attorney and bankruptcy attorney. You can start your search here for tax attorneys that help with tax bankruptcy, or start your search below for the best tax professional to help with your unique tax situation.

IRS Equitable Relief: Requirements for Qualification (Section 6015f)

IRS Equitable relief is the most general type of relief under the innocent spouse relief program. This program can give you relief from joint and several liability from taxes on a married filing jointly return, but it is subject to a lot of interpretation. 

The IRS automatically considers this option for people who don't qualify for innocent spouse relief or separation of liability relief. You can also apply directly to this program if you know that you don't qualify for the other types of relief.

This is a complicated program, and for best results, you should work with a tax pro who has extensive knowledge of the income tax laws in relation to a joint return. This is one of the 10 most litigated tax issues. In other words, innocent spouse and equitable relief claims are more likely to go to tax court than most other tax issues.

What Is IRS Equitable Relief?

Equitable relief is when the IRS decides that it's unfair to hold you responsible for your spouse or former spouse's tax debt on your joint return. This form of innocent spouse relief is the only one that allows you to get relief from an underpayment of tax when your spouse doesn't pay the tax. It can also apply to an understatement of tax on your joint return. Here are some concepts that you should understand before you ask the IRS to grant equitable relief to you.

What Is Underpayment Vs Understatement of Tax?

The other types of innocent spouse relief primarily focus on the understatement of a tax liability. This happens when someone doesn't report all of their income or when they claim excess credits to reduce the amount of their income tax liability on their tax return. As the requesting spouse, you can ask for relief if your spouse or former spouse understated the tax.

An underpayment of tax is a situation where the amount shown on the return is correct but the taxpayer fails to pay the full amount. For example, imagine that you (the requesting spouse) gave your former spouse $5,000 for your tax debt, but your former spouse spent the money on gambling. In this type of situation, you can ask for relief on the unpaid income tax liability. IRS equitable relief is the only spousal relief program that lets you request help with unpaid tax caused by your spouse or former spouse.

Who Is the Requesting Spouse?

The requesting spouse is the one who applies for innocent spouse relief. When you are a requesting spouse, you have to establish why you deserve this type of relief. The other spouse or former spouse is called the non-requesting spouse. Both of you filed a joint return together.

What If My Spouse Doesn't Pay Tax?

 As explained above, this is the only type of spouse relief that can help you if your spouse doesn't pay the tax debt that you owe from your joint return. Generally, the other types of spousal relief focus on separation of liability relief.

Separation of liability relief is when the IRS breaks down the income reported in your return to figure out which part of the tax debt is owed by you (the requesting spouse) versus your spouse or former spouse. Then, you're only responsible for your portion of the bill plus anything stipulated in your divorce decree. If you live in a community property state, the community property law as well as your divorce decree can affect how this plays out.

However, separation of liability relief doesn't have to come into play in this program. With this program, even if part of the tax bill was yours, you may be able to get relief if your spouse didn't pay the bill.

What Does the IRS Consider When You Apply for Equitable Relief?

Whether you're applying for equitable relief because your spouse understated the tax or didn't pay the tax, the IRS will start by considering the following seven factors:

• The marital status of the requesting spouse. Unlike innocent spouse relief focused on liability seperation, you don't have to be divorced to get equitable relief, but it can help your case. However, if you want streamlined approval, you must be divorced or no longer married.

• If you will experience economic hardship if the relief isn't granted.

• If you know about the situation that caused the understatement or underpayment of the tax. You don't necessarily need actual knowledge.

• If you or the non-requesting spouse had a legal obligation to pay the tax debt. For instance, if your divorce decree stipulates that one of you should pay it.

• If you received a significant benefit. Even if you didn't have actual knowledge about the issue, the IRS may not grant equitable relief if you received a significant benefit.

• If you are generally compliant with tax reporting and payment requirements.

• Your mental and physical health.

These are not the only elements the IRS considers. Remember, this is a subjective part of the law, and the IRS looks at multiple elements to assess fairness. The following sections cover more about the requirements for equitable relief.

Conditions to Qualify for Equitable Relief

In order to qualify for equitable relief, you must meet all of the following conditions:

You Do Not Meet the Requirements for the Other Types of Innocent Spouse Relief.

In other words, you do not qualify for innocent spouse relief or separation of liability relief. Again, if you request relief from these programs and get denied, the IRS will automatically see if you qualify for relief under this program.

With All Circumstances and Facts Considered, the IRS Determines It Is Unfair to Hold You Liable

It would be unfair to hold you liable for the understatement or underpayment of taxes. To establish this fact, the IRS may take into account the following factors. These are essentially a repeat of the elements listed above:

• Your marital status

• If you knew or had reason to know when signing the return about the items causing the understatement. With an underpayment situation, whether the requesting spouse had reason to believe his or her spouse or former spouse would pay the taxes. You may be able to get partial relief if you only knew about some of the issue.

• Whether you would suffer economic hardship without relief. Hardship refers to an inability to pay reasonable basic living expenses.

• If there is a legal obligation under the divorce decree or agreement to pay the tax from your joint income tax return.

• Whether you received significant benefit from the unpaid tax or understatement of tax.

• Your mental and physical state when you signed the return or at the time you requested relief.

• To whom the tax interest and penalties are attributed. Normally, you have joint and several liability with a joint return, but again, when you request relief, the IRS looks past the usual law to see what's fair.

• If you made an effort to comply with income tax laws following the taxable year or years to which the request relates.

• If your spouse or ex-spouse abused you. If you are in an abusive situation, consider calling National Domestic Violence Hotline at 1-800-799-7233.

You and Your Spouse/Ex-spouse Did Not Transfer Assets to Deceive the IRS or Another Third Party

In other words, your spouse/expose and you didn't transfer assets to each other to avoid taxes or to deceive someone other than the IRS. However, if you only own the property due to a community property law in your state, this doesn't apply. Similarly, you can get an exemption from this rule if your ex-spouse was abusive or if you weren't aware that the property was transferred to you.

You Didn't File or Fail to File a Tax Return With the Intent to Defraud

If you filed an incorrect tax return (signed it) or failed to file a tax return at all, you must not have had the intention to commit fraud. A fraudulent scheme is when you intend to cheat on your taxes. A mistake is not the same as a fraudulent scheme.

The Taxes That You Want Relief From Relates to an Item Attributed to Your Spouse.

There are a few exceptions to this rule:

• You did not know that funds meant for payment of tax were misappropriated by your spouse/ex-spouse.

• The item is yours only due to common property laws.

• You can prove that you were a victim of abuse before signing the tax return. You must also show that you didn't challenge any items on the tax return because of fear of your spouse.

• Item(s) is in your name but you can prove that it is not actually yours.

• You establish your spouse or former spouse's fraudulent activities are the reason for the errors on the tax return causing the tax understatement.

Your Request Must Be Within Respective Statutory Time Periods

• If A Balance Is Due, You Have to File Within Time Frame IRS Has to Collect – If you have a balance due, the IRS generally has 10 years from the date of assessment to collect. Therefore, if you have a balance due you need to file Form 8857 within the time period the IRS can legally collect.

• Generally, 3 Year Time Limit for a Credit or Refund – If you are requesting a refund or credit for taxes paid, you must file the request within 3 years after the date the tax return is filed or 2 years following the payment of tax, whichever is later. However, exceptions exist for those in a federally declared disaster area or those mentally unable to manage their finances.

• If You Have a Balance Due and a Credit or Refund – The time periods discussed above apply for any credit or refund for any payments made. Moreover, the collection time period (generally 10 years) will apply for a balance due to unpaid taxes.

Refund Limits with IRS Equitable Relief

There are a few exceptions and cases where you may be able to get a refund.

• If the IRS grants you relief related to an understatement of tax, the IRS may grant a refund on payments made through a payment plan. You must have made the payments after you applied for innocent spouse relief. Moreover, you cannot have defaulted on your payment agreement. The payments must be related to the tax or penalty for which you are seeking relief.

• If you receive relief for underpayment of tax, you can receive a refund on payments you have made. You must have made the payment on your own and not with your spouse. There are time restrictions on these payments and their eligibility for a refund.

Can You Reapply for Equitable Relief IRS After a Denial?

In most cases, the only reason to reapply for equitable relief after a denial is if your situation has changed. For instance, if you are no longer married, you may want to reapply. For best results, you should contact a tax pro who has experience with the IRS's equitable relief program. They will be able to let you know if equitable relief is the right option for your situation. If not, they should be able to help you explore other options for dealing with unpaid taxes or the income tax liability of your spouse or former spouse.

Equitable relief is a great form of relief, but it can be challenging to get this type of innocent spouse relief. Even if a taxpayer meets the eligibility requirements there is no guarantee that the IRS will approve the relief request. It is best to work with a tax professional when filing for this type of relief. Here you can find a list of tax professionals who have experience with innocent spouse cases. Or you can start your search below using the applicable filters.

Help With Innocent Spouse Relief: Relief from Joint Liability

Do you need help with innocent spouse relief, equitable relief, or separation of liability? Not sure if you qualify? Need help understanding the detailed requirements? You can find a list of tax professionals that have experience with innocent spouse relief here. At TaxCure we have a large network of professionals that specialize in tax problems and tax solutions. Our algorithm helps you find the best professional based upon your unique needs. Check out the results and find the best professional to help. Click the aforementioned link or start your search below.

Various licensed tax professionals specialize in innocent spouse relief, and they know exactly what criteria you need to get your request accepted. Furthermore, these professionals can analyze your situation and let you know if you are a good candidate for relief. If you qualify, they can file all the documents and deal with the IRS and/or state for you.

If you are not a good candidate for innocent spouse relief, they can suggest other options for settling your taxes and resolving your problems with the IRS and/or State.

How a Tax Professional Can Help with Innocent Spouse Relief

A tax professional improves the chances that your request for relief will be accepted and whether you qualify (so you don't waste money or time). Consequently, if your request is rejected, requesting relief for the same year(s) will be difficult. That’s why it’s important to file correctly the first time.

Here are some advantages to using a tax professional for innocent spouse relief help:

• The IRS and many states actually prefer working with a tax professional. As a result, tax professionals make the jobs of IRS/State employees easier.
• A tax professional can stop collection activities such as wage garnishment or asset seizure. Realize, that as soon as the professional puts in your application for relief, all collection activity stops.
• A tax professional can help you decide if your request for relief is likely to get approved and can help you with the process.
• Tax professionals understand all the rules and requirements. You don’t have to worry about reading confusing instructions and filling out long forms.

How Innocent Spouse Relief Service Usually Works

Many tax professionals will give you a free no-obligation consultation to determine if you are a great candidate for Innocent Spouse Relief, Equitable Relief, or Separation of Liability Relief. The consultation generally carries no obligation. Many professionals start off with an investigation, which will confirm what you owe, penalties and interest assessed, as well as any required tax return filings. Finally, a tax professional will provide guidance on tax programs you may want to pursue.

Second, you will obtain a cost estimate for the tax services needed to get into compliance and into a resolution with the IRS and/or State. This estimate will break down the services required to get you into compliance and into a resolution with the IRS and/or State.

Third, if you decide you want the tax services, a tax professional official can represent you with a completed power of attorney submitted to the IRS or the state taxation authorities. Consequently, this process stops the IRS (and/or State if you submit a State POA) from contacting you and routes all communication through your hired tax team.

Fourth, your licensed tax team will file all required forms and documentation. You may need to retrieve certain documents required for your tax resolution or tax filing.

FAQs for IRS Innocent Spouse Relief

Here are some frequently asked questions regarding IRS Innocent Spouse Relief. Feel Free to send us a question that you don’t see answered here.

What is the IRS Innocent Spouse Rule?

The IRS Innocent Spouse Rule provides an exception to the joint and several liability on a joint return. Normally, both spouses are responsible for the tax due on a joint tax return. However, if your spouse omitted income or didn't pay the tax bill and you were unaware of the situation, you may qualify for relief. 

What is equitable IRS relief?

The IRS will also grant innocent spouse relief in situations where a reasonable person would think that it's unfair to hold you responsible. This is called IRS equitable relief. If you don't qualify for the other types of innocent spouse relief, you should look into equitable relief. It's also the only option if your spouse underpaid the tax. 

What qualifies for Innocent Spouse Relief?

You can request innocent spouse relief if your spouse or ex-spouse underreported or underpaid federal income taxes on a jointly filed tax return. Underreported means that the spouse or former spouse didn't report all of their income or claimed excess credits to lower (or underreport) their tax due. Underpayment is when your former spouse didn't pay the tax due that was shown on the return.

How does the IRS define actual knowledge?

You may hear this phrase when applying for innocent spouse relief. If you actually knew about the error made by your spouse, you have “actual knowledge”. You don’t qualify for innocent spouse relief. Both you and your spouse are still liable. However, you don't need to know all the details to have actual knowledge. For instance, say that you knew your spouse had $20,000 in income that they didn't report on your joint return, but you weren't sure how they earned the income. This counts as actual knowledge. 

What if you have actual knowledge but you signed under duress?

You may be able to get separation of liability even if you had actual knowledge of the understatement. For example, imagine that you knew your ex-spouse wasn't reporting income, but you were afraid to say anything so you signed the return. When reviewing your request for relief, the IRS will take into account the fact that you signed under duress or were coerced into signing. 

What is the deadline or time limit for filing for Innocent Spouse Relief?

In most cases, you must file for innocent spouse relief no later than two years after the day the IRS first tried to collect the tax from you. However, there are exceptions.

If you are applying for equitable relief related to taxes owed, you have up to 10 years from the date the tax liability was assessed. If you are applying for a credit or refund under the equitable relief program, you have until the later of three years after the date of assessment or two years after the payment was made.

How can I find tax professionals that specialize in innocent spouse relief?

Here at TaxCure, we have a network of tax professionals who give details on the type of work that they specialize in. We then have an algorithm that ranks those pros based on those specialties to help taxpayers find the best pros for their unique situation. You can follow this link here to see the top-rated innocent spouse relief experts, or you can start your search below and apply the applicable filters to your search.

How does the IRS define “reason to know”?

This is another common phrase when applying for innocent spouse relief. “Reason to know” refers to cases where the IRS believes it’s reasonable that you knew about the issue. For example, if you knew about related facts or information, the IRS may assume that you also had reason to know about this issue. If you had reason to know, you cannot qualify for innocent spouse relief.

What does benefiting from the understatement of tax mean?

In some cases, the IRS may claim that you had a reason to know because you benefited from the understatement of tax. Say that your spouse was earning $80,000 from a side business that they were not reporting to the IRS. You claim that you didn't know about the money. However, your family lived well beyond its means. Due to the extra income, you went on several vacations every year and bought an expensive boat. This means that you benefited from the understatement of tax, and the IRS may deny your request for relief. You can benefit either directly or indirectly. 

Can you apply for innocent spouse relief if you're still married?

You may be able to apply for classic innocent spouse relief or equitable relief if you are still married. To apply for separation of liability, you must either be divorced or not living in the same household for at least 12 months. You can't apply for this type of innocent spouse relief if you're still married and living together. In all cases, however, the IRS takes into account your relationship when reviewing your application. 

What does the IRS mean by members of the same household?

To qualify for some type of relief, you must not be a member of the same household as your spouse/ex-spouse. You and your spouse are not members of the same household if you are living apart. However, if you are still romantically involved or if your spouse is likely to move back, the IRS considers that you are still members of the same household.

What are erroneous items?

Erroneous items can be unreported income or incorrect deductions and/or credits, or incorrect cost basis for capital gains or losses. For example, imagine that your spouse claimed a $10,000 deduction for advertising expenses for their business, but they never actually paid for that much advertising. That is an example of an erroneous item for an innocent spouse claim. 

What type of taxes qualify for innocent spouse relief? 

You can only apply for innocent spouse relief on individual income tax and self-employment tax. For example, if you owe household employment taxes for a cleaning person or nanny, you cannot apply for innocent spouse relief on those taxes. You also cannot apply this type of relief to business taxes or trust fund recovery penalties for employment taxes. 

Will the IRS contact my former spouse?

If you file for innocent spouse relief, the IRS will contact your former spouse and give him or her the option to participate in the process. There are no exceptions to this rule, even if you were a victim of abuse. However, the IRS will not reveal your contact information to your ex-spouse. Note that if your request is denied and you appeal to the Tax Court, your personal details may become a public record. To protect yourself, you should work with a tax professional who can help you navigate this situation. 

What forms do I need to file for innocent spouse relief?

In order to file for innocent spouse relief, you have to submit IRS Form 8857. If you were a victim of spousal abuse, you must also submit a letter explaining that. You may also want to submit a letter with extra details in other cases as well. A letter helps you explain why you meet the requirements for relief.

What is an understatement of tax?

An understatement of tax occurs when your return says you owe less tax than you really owe. This usually happens when someone doesn't report all of their income, reports excessive deductions, or claims credits they aren't entitled to. If your spouse understated the tax on your return without your knowledge, you can apply for spouse relief.

What is an underpayment of tax?

This occurs when the total tax amount on the tax return is correct but the taxpayer fails to remit full payment. If this situation, the innocent spouse cannot apply for traditional innocent spouse relief. But they can apply for equitable relief. 

When am I liable for my spouse's tax liabilities?

When it comes to taxes, married couples can file their return jointly or separately. If you and your spouse decide to file jointly, you will both be liable for any tax liability incurred. This means that if your spouse owes back taxes, the IRS can come after you for the money. However, if you file your taxes separately, you will not be held responsible for your spouse's taxes owed.  Ultimately, it is up to you and your spouse to decide which filing status is best for your situation. If you own joint assets and you aren't personally responsible for your spouse's tax liability, your joint assets can still be at risk of levy from the IRS.

Can I get partial innocent spouse relief?

In some cases, you may qualify for partial innocent spouse relief. This comes into play if you know about some of the income your spouse understated but not all of it. To give you an example, imagine that you knew your spouse won $5,000 at a casino but didn't report it. However, you didn't realize that your spouse actually won $25,000. In this case, you can apply for innocent spouse relief on the $20,000 but not the $5,000. 

What is the difference between injured and innocent spouse relief?

Innocent spouse relief is when you apply for relief of a tax bill due solely to your spouse's understatement of tax. It also includes situations where you ask the IRS to separate the tax liability on a jointly filed return after the end of a relationship. In contrast, injured spouse relief applies when the IRS keeps your tax refund to pay for a debt due solely to your spouse.

For instance, if the IRS seizes the refund from your jointly filed return for your spouse's child support or unpaid taxes from before you were married, you can apply for injured spouse relief. File Form 8379 (Injured Spouse Allocation). If the IRS approves your request, your share of the refund won't be seized for your spouse's debt. 

If I qualified for an offer in compromise, can I still qualify for innocent spouse relief?

No, you cannot qualify for innocent spouse relief if you already qualified and settled your taxes with an offer in compromise. If you've already applied for an offer in compromise for the tax year in question, you should not also apply for innocent spouse relief. 

How many years can my innocent spouse relief filing cover?

Your innocent spouse's relief filing will cover up to six years on the same form. If you want to cover more than six years you will have to file a separate IRS Form 8857 for the additional years.

Applying for innocent spouse relief can be complicated. If you're like most applicants, you probably have a lot of other questions. To get answers to your questions and help applying for relief, contact a tax professional today. Using TaxCure's search feature, you can look for a local tax pro based in your area who has experience with this program. They can answer your questions about IRS innocent spouse relief, and then, they can also let you know if your state has a similar program. 

Useful Articles Related to IRS Tax Appeals

IRS tax appeals are available to those taxpayers that do not agree with particular decisions made by the IRS. The good thing about the office of appeals in the IRS is that it is independent of any other IRS office and is designed where disagreements concerning the application of tax law can be resolved on a fair and impartial basis. Below are some tax decisions that you can appeal. Understand when you can appeal and how you appeal each of these types of decisions made by the IRS. According to IRS statistics, Appeals result in a tax bill that is 40% lower on average.

Appeal an IRS Tax Levy

Once you receive a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” you have 30 days to appeal the decision to levy prior to them taking action. Understand when it is appropriate to consider appealing a tax levy and learn how to request an appeal.

Appeal an IRS Tax Lien

Once a tax lien is filed you will be notified within 5 days. In this notice, you will be given the option to request a hearing. Understand when it is appropriate to request an appeal of an IRS tax lien, how to request the appeal, and who can represent you in the appeal

Appealing an Installment Agreement Decision

Appealing an IRS Installment Agreement (IA) is within your rights as a taxpayer if it is denied or rejected, terminated, or proposed for termination. Understand how to appeal a rejected installment agreement, common reasons for rejection, and how to reinstate the installment agreement.

Appealing an Offer In Compromise

You have the right to appeal an offer in compromise that was rejected by the IRS within 30 days of the date on your rejection letter. Understand some steps or guidelines to follow when requesting an appeal.

IRS Form 12153 – Filing a Collection Due Process Hearing (CDP)

If you receive a notice of intent to levy or a notice of federal tax lien, you have the right to file an appeal. With lien and levy notices, the IRS will send your rights to a hearing. Understanding if you should file a CDP hearing and how to do so.

IRS Collection Appeals Program & Form 9423 (CAP)

How the IRS Collection Appeals Program works to help you resolve your tax problem with the IRS. Details on how and when the CAP process can be used. Details on how to request it and how to use form 9423.

If you are looking to appeal an IRS decision or enforced collection action with the help of a tax professional, you can see qualified a list here, or you can start your search below. 

IRS Bank Levy Guide and Links to Resources

An IRS bank account levy is when the IRS seizes funds directly from your bank account to cover back taxes you owe. 

Before contacting your bank, the IRS must send you a notice giving you 30 days to appeal. If you don't respond, the IRS will contact your bank, and your bank will freeze the money in your account (up to your balance owed) for 21 days. During that time, you must establish financial hardship or show that the levy was done incorrectly. Otherwise, your bank will send the money to the IRS.

An IRS bank levy will only impact the current funds in the account. In fact, once your bank activates the bank levy, it will not affect any future deposits.  The IRS can issue another bank levy later. However, this rarely happens.

Usually, this is the last line of defense for the Internal Revenue Service. The IRS only uses this enforcement collection method after trying to contact you several times without getting a response. To understand more about bank levies and how to stop them, explore the information in the links below.

What is a Bank Account Levy? How it Works, What to Expect

A bank levy is when the IRS seizes the money in your bank account. Here's a brief overview of what to expect, or check out the link above for a more detailed look at the process:

• Tax assessment – You get into tax debt by filing a tax return and not paying, by failing an audit that leads to a tax liability, or by having the IRS assess tax against you when you don't file a return.
• Demand for payment – The IRS sends several notices demanding payment and threatening to take your future tax refunds and your assets.
• Final notice of intent to levy – The IRS sends a final levy notice that informs you of your right to a hearing. If you don't request a hearing or set up payments within 30 days, the agency moves forward with the levy.
• Form 668–A – The IRS sends this levy form to your bank, and by law, your bank must immediately freeze the funds in your account up to the amount owed. The IRS also has the legal right to find out the balance in your account.
• 21 days – Your funds will stay frozen for 21 days. Your bank will only unfreeze the funds if you contact the IRS and prove financial hardship or that the levy was done in error. At the end of this period, your bank will send the money to the IRS.
• Additional collections – If the bank levy does not cover your full tax liability, the IRS may engage in other collection actions such as wage garnishment or property seizure.

How to Stop or Release a Bank Account Levy

If the IRS has frozen the funds in your bank account, there are only a few select ways to stop the levy. Here is a brief overview or check out the link above for a more detailed look at how to release a bank levy:

• Prove immediate financial hardship – If you show that the bank levy causes immediate financial hardship, the IRS will tell your bank to unfreeze the funds. Generally, this means not being able to afford your housing or utility expenses, but the IRS doesn't back down easily so you may want to work with a tax professional.
• Establish that the levy affects exempt funds – The IRS isn't allowed to take certain types of payments including certain pension payments, disability payments, and unemployment. If the levy is affecting funds you have received in this manner, the IRS must release it.
• Find an error in the bank levy process – If the IRS didn't follow the correct guidelines for notifying you or if they missed other procedural rules, they must release the levy on your account. 
• Pay the tax in full – If you pay the tax in full in another way–for example with a credit card–the IRS will release the levy.

Although getting a levy released can be difficult, if you act when you receive the Final Notice of Intent to Levy, you can easily avoid a bank levy by setting up an installment agreement or qualifying for another type of IRS payment option.

Bank Levy Frequently Asked Questions (FAQs)

The link above features answers to commonly asked questions about IRS bank account levies. Here are the top five questions people have:

• What is a bank levy? When the IRS seizes the funds in your bank account.
• Why is my bank account frozen? If the money in your account is frozen, the IRS may have told your bank to levy the funds for unpaid taxes.
• How do you stop a bank levy? After the funds have been frozen, you can usually only stop a levy if there is an error or you're suffering financial hardship.
• Can I get the money back? You can request a refund of seized money and property, but that's unlikely to work except in extreme circumstances.
• Who should I call about a bank levy? Contact the IRS directly or reach out to a tax pro for expert-level help and guidance.

Get Professional Bank Levy Help

Worried about an IRS bank levy? You can find a licensed tax professional who specifically has experience in resolving IRS bank levies here. If you act quickly, they can stop the levy before the IRS seizes your money. If your account is already frozen, they can help you explore options and understand what comes next. Use TaxCure to search for a tax pro who has dedicated experience with bank levies. To learn more about how a tax pro can help, check out the link above.

What is an IRS Bank Levy? How it Works, What to Expect

Key Takeaways

• Bank Levy – The IRS can seize the money in your bank account if you don't pay your taxes. 
• 30-Day Warning – The IRS must give you a 30-day warning before levying your bank account.
• 21-Day Freeze – When the IRS notifies your bank, the bank will freeze the funds in your account for 21 days. 
• Seizure of Your Funds– If you don't pay in full or prove an error, the bank sends the funds to the IRS at the end of the 21 days. 
• Release for Hardship – The IRS will release the bank levy if you're experiencing immediate financial hardship.
• Return of Seized Funds – Once the funds are gone, they are nearly impossible to get back. 
• Avoid a Bank Levy – Take steps to avoid a bank levy as soon as the IRS sends you the Final Notice of Intent to Levy

What Is a Bank Levy From the IRS?

A bank levy is when the IRS seizes the funds in your bank account to cover your unpaid tax bill. 

If you refuse to pay your tax bill and ignore the IRS's demands for payment, the agency may send your bank a levy notice. At that point, the bank will freeze all of the funds in your account up to the amount of your tax owed. Then, if you don't take action to remove the freeze, the bank will send the funds to the IRS in 21 days.

IRS Bank Account Levy Timeline – When Does the IRS Levy Bank Accounts?

If you don't pay your tax bill, the IRS will not levy your bank account right away. The exact timeline varies, but generally, you won't experience a bank levy until your tax bill is at least six months late if not longer. 

When you have unpaid taxes, the IRS sends multiple notices. Typically, each letter gets a harsher tone, and eventually, you receive a Final Notice of Intent to Levy. This notice states that the IRS intends to levy your bank account, wages, or any other property, but it also tells you that you have the right to request a hearing within 30 days. If you request a hearing, you will avoid the levy, and you will get a chance to talk with the IRS about payment plans, settlements, or other arrangements. 

If you do not request a hearing or make suitable arrangements to take care of your tax debt, the IRS will move forward with levying your bank account or other assets. By law, the following conditions must be in place before the IRS can take your assets:

• The IRS assessed a tax liability and sent a notice to demand payment.
• The taxpayer ignored or declined to pay the tax due.
• The IRS sent a “Final Notice of Intent to Levy With Your Right to a Hearing” 30 days prior to the levy.

The IRS sends these notices to your last known address or gives them to you in person at home or work. 

Bank Levy Without Notice

In rare cases, the IRS can levy your bank account without providing a 30-day notice of your right to a hearing:

• The IRS feels the collection of tax is in jeopardy
• You were served a Disqualified Employment Tax Levy

The IRS can also seize your state or federal tax refund without giving you 30 days' notice. However, with nearly any other asset including your wages and property, the agency must give you a 30-day notice and inform you about your right to a hearing. 

IRS Bank Levy Process – What to Expect 

If you do not request a hearing or appeal the levy during the 30-day window, the IRS will send a Notice of Levy on Wages, Salary, and Other Income, generally Form 668–A(C)DO to your bank. The IRS will also send you a copy of the levy notice, which may come as a copy of Form 668-A or as Form 8519. In either case, the IRS tries to time it so that you get your notice the day or a day or two after the bank levy starts. Your bank must comply and freeze the funds up to the amount of your tax debt. At this point, you have an additional 21 days to convince the bank to reverse the levy, otherwise, the bank will remit the funds to the IRS on the 22nd day.

Unless you convince the IRS to release the bank levy during that time, the bank will send the funds in your account directly to the IRS. Banks always comply with levy demands because if they don't, the IRS can hold them personally liable for the taxes.

Can the IRS Freeze Your Bank Account?

Your account does not get frozen during a bank levy. Rather, the funds in your account get frozen. This is a very important distinction because it means that you can continue to use your bank account during and after the freeze. However, you will not be able to access the frozen funds.

To give you an example, imagine that you owe $20,000 to the IRS and you have $21,000 in your account. The freeze will only affect the funds in your account up to the amount of your tax debt plus interest and penalties. Thus, in this case, you would still be able to use the remaining $1,000 in your account. 

Now, say that your tax bill is more than the balance in your account and your bank places a freeze on all of the funds in your account. You will not be able to use that money, but you will be able to deposit other money and withdraw it. If you deposit new money in your account after the freeze is in place, the IRS cannot seize those funds unless it issues a new levy.

If you have outstanding checks or automatic payments when the freeze goes into effect, you should make a deposit to cover those impending withdrawals. Otherwise, your bank may return the payments and assess fees on you.

Funds Exempt From Bank Levy

The IRS can seize a lot of assets to recover unpaid taxes, but there are exceptions, some of which may apply to the funds in your bank account. In particular, the IRS cannot legally seize the following:

• Unemployment benefits
• Certain annuity and pension payments
• Workman's compensation
• Certain service-connected disability payments
• Certain public assistance payments
• Assistance under Job Training Partnership Act
• Judgments for support of minor children

The IRS also cannot take funds that legally belong to another person. With bank accounts, this may happen if the taxpayer is listed as a joint accountholder on an account where they do not really own the funds – for example, an account owned by the taxpayer's disabled adult child that is funded by the child's disability payments but the taxpayer is on the account to help their child. If the IRS has seized funds that should be exempt, contact the IRS immediately to remove the freeze, or reach out to a tax professional for help.

Bank Levy Fees

By law, your bank can charge you a fee for processing the levy. The fee varies from bank to bank, but $100 is the industry standard. If your bank charges a fee and the IRS removes the levy because it was done in error, you can request a refund of the fee from the IRS by filing Form 8546 (Claim for Reimbursement of Bank Charges). You may also be able to get a refund for any overdraft or insufficient funds fees that you incurred due to an erroneous levy. However, you will not be able to get a refund of any fees related to a legitimate bank levy. 

How to Get an IRS Bank Levy Release

Once the levy is in place and your funds are frozen, you can ask for a levy release. The IRS will release the levy if you pay in full, establish immediate financial hardship, or prove that the levy was issued in error. If the IRS refuses to release the levy, you can appeal even if the agency has already taken the funds from your account. 

Immediate financial hardship means that you cannot afford essentials, and you may need to show documentation such as an eviction notice or a utility shut-off warning.

There are several different reasons you may be able to get a levy released due to an error, such as the following:

• You paid in full before the IRS issued the levy.
• The collection period expired before the IRS issued the levy.
• The IRS seized more than you owe.

You may also be able to get the levy released if you set up an installment agreement that has terms that dictate the levy be released or if you prove that releasing the levy will help you pay your taxes in full.

Does the IRS Need to Leave Money for Necessities?

No, if the IRS levies the funds in your bank account, the agency doesn't have to leave you any money. However, if the freeze on your bank account leads to a situation where you cannot cover your essential living expenses, you can petition the IRS to release the levy based on financial hardship. 

Additionally, if you apply for currently not collectible status or another type of IRS relief program, the agency will look at your situation and ensure that they are not taking any money you need for essentials. To determine the amount you need, the IRS uses a set of financial standards. There are national standards that outline how much you should spend on groceries, clothing, car loan/lease payments, and out-of-pocket medical expenses. Then, there are local standards (set on the country level) that show how much the IRS thinks you should spend on housing and utilities.  

How to Avoid a Bank Levy

Except in cases where the levy was issued in error or you're enduring significant financial hardship, it can be very challenging if not impossible to remove a bank levy. However, it's not that hard to avoid a bank levy. As soon as you know that you have a tax bill, reach out to the IRS to make arrangements. If you've been putting off the bill and ignoring notices, you should take action as soon as you receive the Final Notice of Intent to Levy. As long as you act by the deadline on the notice, you still have the ability to request an installment agreement, an offer in compromise, or whatever option works best for your situation. 

True Stories of IRS Bank Levy Relief from Tax Experts

Enrolled Agent Tammy Graham helped a client recover a massive IRS bank levy that had already been seized.

“I worked with a client who had $800,000 levied from his account across multiple tax years. Most of the balance stemmed from audit assessments where the IRS had disallowed all of his Schedule C business expenses, resulting in inflated liabilities.”

“Due to a language barrier, gathering audit appeal documentation took time. The Revenue Officer accepted 'mock' replacement returns for 2017 and 2018 to estimate the correct liability. Once recalculated, the balances were far lower, and the overage was refunded.”

“That level of recovery is rare—but with the right documentation and cooperation, it’s possible.”

Tax Attorney Stephen A. Weisberg helped a client stop a levy and recover frozen funds by acting within the IRS’s 21-day window.

“A client called me in a panic—he’d logged into his bank account and saw the entire balance was frozen. He thought he was done for. Rent and utilities were due, and not a dime was available.”

“I explained how a bank levy actually works and that he had 21 days before the funds would be transferred to the IRS. We quickly prepared a financial statement, submitted supporting documents, and negotiated a payment plan.”

“By day 11, the IRS had released the funds. Understanding the timing and taking swift action made all the difference.”

CPA James M. Cha, CTRS successfully recovered funds already sent to the IRS by proving it was in the government's best interest.

“A client had $20,000 seized from their account after a bank levy. The funds were essential for launching a new business, and the Revenue Officer initially rejected our request for a refund.”

“We escalated the issue to the manager and argued that returning the money would allow the client to stabilize their finances, grow the business, and ultimately improve the IRS’s ability to collect future tax revenue.”

“The IRS agreed and refunded the full amount. Leveraging the ‘best interests of the United States’ clause under IRC §6343 was key to the resolution.”

Help With an IRS Bank Levy & How TaxCure Works

A qualified tax professional can help you successfully negotiate a payment plan, apply for a settlement, or get hardship relief. At TaxCure, we have a network of top tax professionals from around the country who can help with bank levies, and we have a unique algorithm that can find the best professionals based upon specific problems and solutions.

Our goal is to increase transparency in the tax resolution industry, help taxpayers who are looking for a tax professionals avoid scams, and make it much easier to find the best pro that meets your specific issues. You can find a licensed tax professional that specifically has experience in resolving IRS bank levies here. You can message them after looking at their expertise, years of experience, background, reviews, and more. To learn more, check out this page of FAQs on bank levies, this guide to hiring tax professionals, or this tax pro's guide to stopping IRS levies.