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 you owe taxes to the tax agency and do not enter into negotiations for some reason, almost any asset can be frozen or even confiscated, from bank accounts to real estate, with the exception of certain types of income.
Who is required to report to the IRS?
The Internal Revenue Service (IRS) of the United States is perhaps the world’s largest and most meticulous tax authority. Its interests extend far beyond the United States, wherever there are assets, bank accounts, and income belonging to US citizens and residents.
US citizens are subject to taxation by the IRS regardless of their country of residence. All worldwide income is also subject to American taxes, except for the first approximately USD 100,000 of income earned outside the US, with 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.
If an individual fails to pay taxes, the IRS may impose penalties and fines, and in extreme cases, property may be confiscated. Therefore, it is crucial to comply with IRS regulations and ensure taxes are 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 reputation as a rigorous regulatory agency, the IRS does not immediately resort to confiscating bank accounts and other assets. The process is as follows:
- The IRS discovers that a person has not paid their taxes. This may be detected through filed tax returns, information from banks, or other sources.
- The IRS sent a Notice for Demand for Payment, requesting a person to pay their taxes with specified payment deadlines. Several such notifications may be sent, and penalties and fines may 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. The US tax code contains many mechanisms to encourage tax payment and avoid severe punishment.
It’s worth noting that many individuals who fail to pay taxes on their foreign bank accounts and assets are simply unaware of their obligations. Fortunately, the law contains a provision that makes it easier for individuals who admit they were unaware of tax obligations and agree to pay everything that is due.
- 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, including bank accounts, property, real estate, and income.
Additionally, a law called FATCA requires foreign banks to report to the United States about their customers from the US and provide information about their accounts. This means that the IRS can request to freeze and then close the bank account of an American citizen practically anywhere in the world.
If a person is accused of tax evasion, their bank account will be frozen initially, and they will be given time to communicate with the IRS. And only in case of stubborn unwillingness to agree on the debt payment the bank account will be confiscated.
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 movable and immovable property, but these assets are less frequently confiscated. The main focus is on bank accounts, financial assets of any kind, and cash.
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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 tax service, there is a fairly impressive 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 (livestock), and personal use weapons, 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).
- Unfortunately, bank accounts are not included in this list.
Asset protection or tax evasion?
While a foreign bank account does not protect against confiscation in case of tax evasion, it is still a convenient and advantageous tool for everyday life.
However, if we are talking about asset protection, not tax evasion, then you need to carefully consider and establish a more complex system than a single bank account.
Disclaimer: Paying taxes on income is the duty of all tax residents, regardless of their country of residence. Tax evasion is a crime that, in some cases, may result in criminal prosecution and even imprisonment.
There are legal ways to reduce tax payments and ensure asset preservation even in case of unlawful account freezes and blocks. Unfortunately, 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.
Therefore, it is wise to have not just one foreign bank account but several, preferably in different countries. Find out why millionaires prefer to have multiple bank accounts.
It is also wise to establish an asset protection system that will allow you to safeguard your property from unlawful freezes, confiscations, seizures, and greedy former spouses. This will prevent external forces from taking away your assets.
Foreign LLCs, trusts, or funds can be used for this purpose. Similar legal patterns are used by international corporations and wealthy individuals, but the tools are also available to ordinary people who respect and value the fruits of their labor.
We invite you to a free consultation on selecting a foreign company that will allow you to protect your assets. We can also help you choose a suitable bank account and, if necessary, build a more complex multi-level system for protecting international assets.
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What types of income are not taxed and will not be affected by the IRS?
There are types of income that are not subject to federal taxes and are not 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 payments 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
- interest on certain municipal bonds
- compensatory damages for physical injury or illness
- combat pay
- income from renting out during a vacation (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 if you have tax debts.
Therefore, it is essential to avoid creating tax debts. If you have such debts, it is recommended to negotiate with the IRS on a voluntary basis.
