Retirement Accounts Vulnerable to Back Taxes


Tax shelter for long-term savings is one of the features that attract people to Individual Retirement Accounts (IRAs). Once certain age requirements are met, distributions from IRAs are penalty-free, and Roth IRA distributions are tax-free—as opposed to taxable Traditional IRA distributions, since contributions to these retirement accounts are made with pre-tax dollars. Regardless of the type of IRA, both are susceptible to back tax claims from the Internal Revenue Service.

Unlike irrevocable trusts and some other asset protection tools, money in an IRA is unprotected and recognized as property—property that the IRS may place a lien on in order to collect outstanding tax balances. Internal Revenue Code Section 6321 addresses the IRS’ authority to impose tax liens on a person’s property:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
In addition to an IRA’s tax liability, monies from IRAs used to satisfy tax liens are taxable distributions. Although these distributions are exempt from early-distribution penalties if the IRS places a levy on the IRA, the distributions are still taxable. (An early-distribution penalty is only applicable if the IRA account holder volunteers to distribute monies from their account for payment of back taxes.)
What does this mean for taxpayers who have IRAs? Taxpayers are liable for satisfying their tax debts. IRA custodians are banks, mutual fund companies, or other financial institutions that protect assets in an IRA. However, their powers are limited. An IRA custodian, upon receipt of levy notification, must comply with the demands of the IRS and turn over the taxpayer’s retirement account. Under federal regulations, the IRA custodian is liable for paying penalties if they fail to comply. In these situations, taxpayers who owe back taxes have no recourse for shielding their retirement accounts. Additionally, taxpayers have no ability to collect lost funds from the IRA custodian if the custodian complies with the IRS’ demands.
With these liabilities in mind, individuals should review investment options for retirement with a North Carolina tax attorney. Combining retirement planning and asset protection helps taxpayers protect savings for senior years in the event of an unexpected tax debt. Choosing other asset protection tools can also offer creditor protection and shield assets from judgment claims. Fortunately, in 2013 the North Carolina General Assembly passed a bill into a law that provides (non-IRS) creditor protection for inherited IRAs in North Carolina, which you can read about at the link.
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