What the IRS Cannot Take From a Retiree

Floridians grow up hearing that the state protects homes and retirement accounts from creditors. That is true for most creditors. The IRS plays by federal rules, and those rules are narrower.

Knowing exactly where the lines are does two things. It keeps you from relying on protections you do not have. And it shows you the protections you do have, some of which are stronger than people think.

The controlling rule: section 6334(c)

Internal Revenue Code section 6334(c) says: notwithstanding any other law of the United States, including section 207 of the Social Security Act, no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).

That sentence does a lot of work. State exemption laws, including Florida Statute 222.21 for retirement accounts and the homestead protections in Article X, Section 4 of the Florida Constitution, do not create exemptions from a federal tax levy. The Social Security Act's anti-garnishment rule does not either. If it is not on the 6334(a) list, the statute does not protect it.

The 6334(a) list, through a retiree's eyes

Notice what is missing: Social Security retirement benefits, IRAs, 401(k)s, private pensions, bank accounts, brokerage accounts, and life insurance cash value. None of those are on the list.

Your home

Section 6334(a)(13) is the most important protection for retired homeowners. It works in two layers:

• Small deficiency cases. If the levy amount is $5,000 or less, real property used as your residence is exempt from levy.
• Principal residence. Above that, your principal residence still cannot be levied unless a federal district judge or magistrate approves it in writing under 6334(e)(1). The district courts have exclusive jurisdiction to approve it.

A federal tax lien still attaches to the home, and the IRS can still file suit to foreclose its lien under IRC 7403. But an administrative seizure of your principal residence requires a court's sign-off first. The Pinellas-specific discussion is in the Pinellas homestead exemption and the IRS.

Protected by IRS policy, not by statute

Some of the most meaningful protections for retirees are not in 6334 at all. They are in the Internal Revenue Manual. Policy is weaker than a statute, but the IRM binds IRS employees, and a levy that ignores it can be challenged.

• Retirement accounts. IRM 5.11.6.3 requires a Revenue Officer to consider other collection alternatives, to find flagrant conduct, and to decide whether you depend on the account for necessary living expenses before levying it, with approval from a senior manager. Details in can the IRS levy your IRA in Florida?
• Social Security. IRM 5.11.6.2.1 tells Revenue Officers to use discretion and generally to consider other levy sources first. The automated 15% FPLP levy is the more common route. See the IRS 15% Social Security levy explained.
• Low income filter. IRM 5.11.7.3.2.3 excludes Social Security recipients from the FPLP when estimated income is below 250 percent of the federal poverty guidelines.

Other statutory limits that help

Beyond the exemption list, the Code limits how and when the IRS can levy anything:

• Notice first. IRC 6330 requires a Collection Due Process notice at least 30 days before levy.
• No levy during certain requests. IRC 6331(k) bars levy while an offer in compromise or installment agreement request is pending, and while an agreement is in effect.
• No uneconomical levies. IRC 6331(f) bars a levy if the IRS's expected costs exceed the property's fair market value.
• Mandatory release for hardship. IRC 6343(a)(1)(D) requires release when a levy causes economic hardship.

Life insurance and annuities

Retirees often hold whole life policies or deferred annuities they think of as untouchable. Under federal tax law, they are not. IRM 5.11.6.4.1 covers levies on the cash loan value of life insurance. Under IRC 6332(b), when the IRS levies a life insurance or endowment contract, the insurer pays over the amount you could have borrowed against the policy, but only on the 90th day after the levy is served. That 90-day window gives you time to resolve the debt or request release.

Commercial annuities and the cash surrender value of an annuity contract are property too, and not on the exemption list. Once an annuity is paying out, the levy can reach the stream of payments. See IRS levies on private pensions and annuity payments.

Joint property

Florida couples often hold property as tenants by the entirety. For a debt owed by only one spouse, that form of ownership can matter a great deal, but the federal analysis is different from the state one, and a federal tax lien can attach to the liable spouse's interest. If you own property jointly with a spouse who does not owe the tax, get advice before you sell, refinance, or transfer anything.

Where Florida law still matters

Florida's exemptions are not useless in a tax case. They control what private creditors can take, which shapes your overall financial picture. They also matter in bankruptcy, where exempt property can be kept, though a federal tax lien recorded before the filing can survive. See tax bankruptcy in Pinellas County.

The practical order of risk

When a retiree owes the IRS and does nothing, the usual order of enforcement looks like this: refunds are offset first, then the automated 15 percent Social Security levy begins, then bank accounts get levied, and only in more serious cases does a Revenue Officer look at retirement accounts or real estate. That order is not a rule, but it reflects how the IRS's automated systems and its own manual work. It also means the earliest losses are usually the smallest and the easiest to stop.

Next step

If the IRS has levied something you believe is exempt, act inside the time limits. A bank holds levied funds for 21 days under IRC 6332(c). Identify the exemption by paragraph, document it, and request release in writing. Call (813) 229-7100 if you want help. The firm's page on IRS tax levies covers the broader process.