You should discuss this with your bank counsel as your institution can possibly face an IRS penalty if you don't respond to the levy in a satisfactory manner to the IRS.
Last edited by RayLynch; 01/11/12 06:50 PM.
It would not surprise me that the IRS will take the position that its levy reaches any and all property the taxpayer has on deposit with your institution, regardless of the fact the funds are in an account that the taxpayer doesn't own. If the taxpayer has access to and transactional authority over the account into which the taxpayer's money is deposited, I can see the IRS saying its levy reaches the taxpayer's funds in that account. The fact that you know the taxpayer is depositing personal funds in the account will reinforce the IRS' position.
If, under federal law, the IRS levy does reach the taxpayer's funds in the account, then how do you determine what portion of the funds on deposit belong to the customer and to the taxpayer? You may very well have an accounting nightmare on your hand.
If the IRS doesn't believe your institution has remitted the proper amount in response to its levy, it can assess a penalty equal to the amount it believes it should have received from your institution.
While Randy's suggestion to make the person stop or close the account is appropriate, you still have to decide how to respond to the levy. If you elect to remit funds to the IRS, your customer may dispute your calculations and raise a wrongful dishonor claim if you return any items after sending (what it thinks is too much) money to the IRS.
Clearly, your institution is caught in the middle and obtaining legal advice on how to respond would be advisable.