Financial institutions are often required to make tough decisions when they receive the daunting Form 668–A, “Notice of Levy” from the IRS concerning a delinquent taxpayer’s bank account. If the IRS levies a bank account, financial institutions are required to immediately freeze all funds in the account upon receiving the Notice of Levy and must remit the balance to the IRS after 21 days (up to the amount of the unpaid tax liability). However, when the IRS levies a business bank account and the delinquent taxpayer’s name appears as a signatory on the account, a financial institution’s decision to freeze the business bank account can be difficult when the delinquent taxpayer’s ownership interest in the bank account remains unknown. Financial institutions must understand their obligations upon receipt of Notice of Levy to make a decision that minimizes their exposure to liability.

What is a Tax Levy?

A tax levy is a legal seizure of a taxpayer’s property to satisfy a tax debt. A levy is different from a tax lien, as a tax lien is a legal claim against property to secure payment of the tax debt, whereas a tax levy allows the IRS to physically take possession of property owned by a taxpayer to satisfy their tax debt. 26. U.S.C. §6331 provides the framework and procedure for obtaining a tax levy on a taxpayer’s property. To collect unpaid taxes, 26. U.S.C. §6331 authorizes the IRS to apply any means necessary to seize all property and any rights to property belonging to a taxpayer if a taxpayer neglects or refuses to pay their unpaid tax within 10 days after notice and demand from the IRS.

Property Subject to a Tax Levy

Practically any property owned by a taxpayer can be levied by the IRS to collect unpaid taxes. Specifically, 26 CFR § 301.6331-1(a)(1) defines “property” to include any property, or rights to property, whether real or personal, tangible or intangible, belonging to the taxpayer. This broad definition of property excludes only the few exceptions identified in 26. U.S.C. §6334, which most notably excludes up to $6,250 of fuel, provisions, furniture, and personal effects in the taxpayer’s household, up to $3,125 of tools necessary for the taxpayer’s trade or business, and certain benefits or income ordinally protected from creditors.

In determining whether a person has an interest or rights in property that may be subject to a tax levy, such person’s rights or interests to property are determined under state law. If state law creates sufficient interests in a person’s rights or interests to property, federal law and the United States Code create the tax consequences. United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722 (1985). However, the Supreme Court emphasized the provisional nature of a tax levy and the importance of its use as an expeditious tool to protect the government’s interest, allowing questions of ownership to be determined in a post-seizure proceeding. United States v. Bank of Am., 06CV711A, 2009 WL 2009022, at *6 (W.D.N.Y. Feb. 20, 2009). Thus, it has been held that a tax levy attaches to even “a modicum” of interest the tax debtor may have in the levied upon property. Id.

Business Bank Accounts Subject to a Tax Levy

The general rule is that business property is property of the business entity, and owned separate and apart from its owners. In re Kane, 470 B.R. 902, 932–33 (Bankr. S.D. Fla. 2012). While business bank accounts are undoubtably property of the business entity, Florida law appears to be silent on whether the owner of an entity, who is also the principal on the bank account, has even a “modicum” of rights or interests in such bank account. A Florida court has determined a bank account is the business’s property and not property of its owners until distributed from the business to the owners. In re Kane, 470 B.R. 902, 932–33 (Bankr. S.D. Fla. 2012). However, In re Kane did not involve an IRS tax levy, which is significant considering courts grant the IRS greater access to property than an ordinary creditor.

Additionally, both Florida and Federal law allow for the IRS to levy a business bank account when the bank account is the “alter ego” of the individual, and Florida courts routinely apply the corporate law doctrine of veil piercing to Limited Liability Companies. Upfitters, L.L.C. v. Brooking, 3:18-CV-496-J-34PDB, 2020 WL 954984, at *5 (M.D. Fla. Feb. 27, 2020). If alter ego status is established, all of the assets held by the taxpayer’s alter ego may be liquidated to satisfy a delinquent tax debt. Eckhardt v. United States, 08-21791-CIV, 2010 WL 11504339, at *5 (S.D. Fla. July 8, 2010). To succeed on an alter ego theory and pierce the corporate veil, a claimant must establish three elements: (1) the shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence was in fact nonexistent and the shareholders were in fact alter egos of the corporation; (2) the corporate form must have been used fraudulently or for an improper purpose; and (3) the fraudulent or improper use of the corporate form caused injury to the claimant. Id.

Financial Institutions Tax Levy Obligations and Liability Exposure

When a financial institution or third party possesses property subject to a tax levy, careful attention must be given to their obligations when they receive a Notice of Levy from the IRS. 26. U.S.C. §6332(a) provides in relevant part that any person in possession of property or rights to property subject to levy upon which a levy has been made shall, upon demand surrender such property or rights to the government. Particular attention must be given to the risks associated with non-compliance, as 26. U.S.C. §6332(d)(1) provides that any person who fails or refuses to surrender any property or rights to property, subject to levy, upon demand by the IRS, shall be liable in a sum equal to the value of the property or rights not so surrendered, but not exceeding the amount of taxes for the collection of which such levy has been made, together with costs and interest on such sum at the underpayment rate established from the date of such levy. Additionally, 26. U.S.C. §6332(d)(2) provides that in addition to the personal liability imposed by 26. U.S.C. §6332(d)(1), if any person required to surrender property or rights to property fails or refuses to surrender such property or rights to property without reasonable cause, such person shall be liable for a penalty equal to 50 percent of the amount. Thus, financial institutions must ordinarily freeze and turn over funds held in a customer account in response to a federal tax levy or risk both direct liability for the unpaid taxes, and a substantial penalty for failing to comply with the levy without good cause.

1. Defenses to a failure to surrender

Courts have uniformly held that financial institutions served with an IRS notice of levy have only two defenses for a failure to comply with the demand. One defense is that the financial institution, in the words of 26. U.S.C. §6332(a), is neither “in possession of nor obligated with respect to” property or rights to property belonging to the delinquent taxpayer. The other defense, again with reference to 26. U.S.C. §6332(a), is that the taxpayer’s property is subject to a prior judicial attachment or execution. Where a third-party is served with a notice of levy asserts the defense that it is not in possession of property in which the tax debtor has an interest, the party asserting such a defense has the burden of persuasion with respect to the defense.

2. Questions concerning bank account ownership and 3rd party liability immunity

When questions exist as to a delinquent taxpayer’s rights or interests to property subject to an IRS tax levy, financial institutions risk substantial liability for failure to comply with levies on business bank accounts considering delinquent taxpayers may appear to have a “modicum” of rights or interest therein. Federal law and Florida law offer broad protections to financial institutions that comply with a tax levy even when the delinquent taxpayer’s interests in the bank account remains uncertain. Specifically, 26 U.S.C. §6332(e) provides that any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made who, upon demand by the IRS, surrenders such property or rights to property to the IRS are discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment. Thus, when a financial institution in possession of a business bank account subject to an IRS levy makes a good faith determination that the delinquent taxpayer has an apparent interest or rights in the account, and freezes the bank account and surrenders the property to the IRS in response to the levy, they are relieved of liability from any third party who has an interest in the property or rights to property, even if it is subsequently determined that the property was not properly subject to levy. Pro-Steel Bldgs., Inc. v. United States, 810 F. Supp. 2d 1302, 1305–06 (N.D. Fla. 2011).

3. Exceptions from 3rd party liability immunity

Immunity from liability under 26 U.S.C. § 6332(e) has been interpreted both broadly and generously, and courts have held it applies whether or not the underlying levy is valid. Weissman v. United States Postal Service, 19 F.Supp.2d 254, 260 (D.N.J.1998). The limited circumstance identified in 26 CFR § 301.6332-1(c)(2) remains the only exception to immunity from 3rd party liability, and provides that immunity against liability from 3rd parties does not apply when a person or financial institution surrenders property or rights to property in which the delinquent taxpayer has no apparent interest. For example, a financial institution that receives a levy on the account of John Doe is not protected if it turns over funds from the account of Jane Doe or if it turns over funds of multiple customers all named John Doe.


The interplay between 26. U.S.C. § 6332(d) and 26 U.S.C. § 6332(e) places financial institutions in a difficult position when the IRS levies a business bank account in which the delinquent taxpayer may have an interest or rights thereto. 26. U.S.C. § 6332(d) creates harsh consequences for financial institution that fail to comply with a tax levy, by subjecting financial institution to direct liability for the amount of the delinquent taxpayer’s unpaid taxes, with costs and interest, plus a 50% penalty of the amount owed should the failure to surrender occur without reasonable cause. Meanwhile, 26 U.S.C. § 6332(e) offers financial institutions broad immunity against liability from 3rd parties when complying with a tax levy, and encourages financial institutions to levy the bank account while parties subject to the levy challenge it through administrative channels or civil action.

Although customer relationships and customer service remain factors that financial institutions consider when determining whether to comply with a Notice of Levy from the IRS, financial institutions must also appreciate the 3rd party liability immunity provided through compliance in light of the substantial liability exposure created by failing to comply with the Notice of Levy. These factors ultimately combine to create a compelling interest for financial institutions to comply with the Notice of Levy and immediately freeze any bank accounts in which the delinquent taxpayer may have even “a modicum” of interest therein. When questions concerning a delinquent taxpayer’s interest in a bank account exist, financial institutions must be sure to protect their interests, and should only avoid freezing bank accounts when there are additional factors clearly establishing that the delinquent taxpayer does not possess even “a modicum” of interest in the bank account, and upon receiving adequate protections or indemnifications from liability.

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