What Bank Account Can the IRS Not Touch?

A common question among American citizens and tax residents of the United States is: which bank accounts and assets are protected from confiscation by the IRS in case of claims? And what bank account can the IRS not touch? If the IRS claims you owe taxes, their first action is usually to freeze your bank accounts. This may leave your business paralyzed, making you unable to earn money to pay your tax debts, and you might even find yourself unable to pay for legal representation. Almost any asset can be frozen or even confiscated: from bank accounts to real estate, with the exception of certain types of income or assets such as the homestead exemption in some states, or alimony.

Who is required to report to the IRS?

The Internal Revenue Service (IRS) of the United States is perhaps the world’s largest tax authority with the longest tentacles. Its interests extend far beyond the United States – to wherever there are assets, bank accounts, and income belonging to US citizens and residents. Ominously, according to a recent press release, the  IRS has “11 attaché offices strategically positioned abroad to tackle financial and tax-related crimes and train foreign government partners on investigative techniques.”

US citizens are subject to taxation by the IRS regardless of their country of residence. All worldwide income is subject to American taxes, except for the first approximately USD 100,000 of earned income (but not passive income) outside the US, subject to timely and accurate tax reporting. In other words, if an American citizen or resident has income, they are generally required to pay taxes, regardless of where they reside and receive this income. This tax burden can sometimes be reduced by applying the benefits of Double Tax Avoidance treaties (DTTs) but not all countries have signed such agreements.

If an individual fails to file or pay taxes, the IRS will impose penalties and fines, and in many cases, property may be confiscated. Alleged tax debts over $50,000 can also lead to cancellation of your US passport. If this happens to you, you are the one who has to launch a lawsuit against the IRS, not the other way around! Therefore, it is crucial to comply with tax laws, IRS regulations and ensure returns are filed taxes paid on time to avoid severe consequences!

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Under what circumstances does the IRS freeze and confiscate bank accounts and other assets?

Despite its fearful reputation and urban legends, the IRS does not immediately resort to confiscating bank accounts and other assets. The process is as follows:

• The IRS decides that a person has not paid the correct taxes. This may be based on filed tax returns, information from banks, an audit, or many other sources.
• The IRS sends a Notice for Demand for Payment, requesting a person to pay a specific amount by a certain date. . Several such notifications may be sent, and penalties and fines will begin to accrue for late payment.
• Within the specified period, this person must pay the debt or contact the IRS to arrange a payment plan or dispute the assessment. The US tax code contains many “carrot” mechanisms to encourage tax payment and avoid the “stick” of severe punishment. For this reason, expert advice from a qualified professional is a must.

• If the debt is not paid, and the person does not contact the IRS, they are considered to have refused the IRS’s request.
• After that, a Final Notice of Intent to Levy is sent, and there is a 30-day period to negotiate. Otherwise, the IRS will begin confiscating bank accounts and other assets.

What assets can the IRS confiscate?

The IRS can confiscate virtually any asset within US jurisdiction, including bank accounts, property, real estate, and income. Generally, the IRS cannot confiscate assets held outside the US.

Additionally, a law called FATCA (the “Foreign Account Tax Compliance Act” requires foreign banks to report to the United States about their customers from the US and provide information about their accounts. If, however, a person is accused of tax evasion or fraud, their bank account will be frozen initially, and only afterwards will they be given time to communicate with the IRS.In addition to bank accounts, both checking and savings, the IRS can seize other assets, such as dividends, income from real estate, and even income from joint assets.

This list also includes real estate, vehicles, and any other assets like boats, art, wine or cryptocurrencies, to name just a few. However these assets are less frequently confiscated because it means more work for IRS agents. The main focus is on bank and brokerage accounts: financial assets of any kind, and cash. These can be frozen by the IRS with a few clicks of a mouse – no court order nor other legal action is required and the burden of proof generally rests with the taxpayer.

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What assets and property will not be touched by the IRS?

Despite the stereotype that a taxpayer can literally be left with nothing after the arrival of the IRS enforcement agents, there is a fairly long list of property and sources of income that they do not have the right to seize. These include:

• clothing, shoes, and school textbooks necessary for the taxpayer or their family members
• fuel, food, furniture, household pets, and weapons for personal use, the value of which does not exceed USD 6,250
• books and tools necessary for the taxpayer’s business, totaling up to USD 3,125
• unemployment benefits (of any amount)
• certain types of annuities and pension payments
• income that is court-ordered for supporting minor children
• some disability payments
• government assistance
• residential property (with small debts) depending on the state.

Unfortunately, bank accounts are not included in this list.

Asset protection or tax evasion?

While a foreign bank account does not protect against accusations of tax evasion, it cannot be easily seized by the IRS. It’s perfectly legal for Americans to hold foreign bank accounts, so an offshore account (even a simple bank account in your personal name) is a simple tool to protect against arbitrary seizure by the IRS. Having an offshore account for a rainy day can buy you time and leverage in case of a dispute with the IRS.

However, if we are talking about more robust and sophisticated asset protection, not tax evasion, then you should carefully consider  a more complex system of asset protection than a single bank account.

There are legal ways to reduce tax payments and ensure asset preservation even in case of unlawful account freezes and blocks. Unfortunately, it’s well known that even the IRS can make mistakes and wrongfully freeze your bank account. You will need to prove your innocence, and during this time, your account will be inaccessible – so who will pay your living expenses, never mind the legal fees needed to fight the freezing order?

Therefore, it is wise to have not just one foreign bank account but several, preferably in different countries and held in different structures such as trusts, foundations and LLCs. Find out why millionaires prefer to have multiple bank accounts.

It is also wise to establish an asset protection structure that will allow you to safeguard your property from unlawful and unjust freezes, confiscations, and seizures, not to mention greedy former spouses. This will prevent external forces you cannot control from taking away your assets.

Foreign LLCs, trusts, or foundations can be used for this purpose. Similar legal structures are used by international corporations and wealthy individuals. The good news is that these same tools are also available to ordinary people who respect and value the fruits of their labor.

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What types of income are not taxed and will not be affected by the IRS?

There are certain types of income that are not subject to US federal taxes and cannot be touched by the IRS. However, some of these incomes may be seized if there are tax debts for other assets. Additionally, the separate states may collect their own taxes at the municipal level.

Examples of such income include:

• payments to veterans
• child benefits
• social payments
• compensation for employees
• payments to foster families
• insurance payouts for accidents
• payments from the State fund for victims of crimes
• subsidies for disaster relief
• Black Lung benefits – payments to coal mine workers
• income from the Supplemental Security Income program (SSI)
• Interest on certain municipal bonds
• compensatory damages for physical injury or illness
• combat pay
• income from renting out during a vacation (AirBnB or similar – up to 15 days per year)
• payments related to life insurance in case of death.

However, you need to remember that the account where these funds are deposited can still be frozen!

Therefore, it is essential to avoid running into problems with the IRS. Many lives have been destroyed by run-ins with the IRS. If you have such problems, it is recommended to hire an experienced lawyer to negotiate with the IRS on a voluntary basis. If you don’t have problems with the IRS, remember that you could be next in line – and a foreign bank account is the first line of defense.