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IRS Levy on Account w/Return Check NSF

Question: 
We received an IRS Levy last week, and our customer had $800 available at the time the levy was received. We placed a hold on the funds. Two days later we received notice that a $3,000 check he deposited was being returned for NSF. This meant true account balance available would have been ($2,200) at the time of levy. When we received the $3,000 check back, we debited his account, and he was negative. He has since deposited cash and has $100 available (including the $800 hold for levy). Checks are now presenting that we could pay if the $800 hold was not there. What am I obligated to pay the IRS now?
Answer: 

Answer by Randy Carey: You are obligated to turn over the balance of the account at the time the levy was served ($800). Any activity in the account after that time does not impact your obligation to turn over those funds, even if it would mean the bank would suffer a loss.

See 301.6332-3(c)(e)

Answer: 

Answer by Ken Golliher: I'll disagree. You do not owe the IRS money you would not have owed the depositor under the same set of facts. Under the UCC, your right to revoke the provisional credit you gave for the $3,000 NSF check existed prior to your receipt of the levy.

I suggest you let your bank counsel break the tie.

Answer: 

Answer by Randy Carey: I will second the suggestion that you let bank counsel break the tie, but it is clear that at the time of the levy, the bank had made the $3,000 that had been previously deposited available for withdrawal prior to the levy being served regardless of whether the check was eventually returned.

5.11.4.3 (09-14-2010)
Amount that Must be Surrendered

2. The notice of levy only reaches the amount on deposit when the levy is received. Money deposited later is not surrendered, including deposits during the holding period. Another levy must be served to reach this money. Also, the levy only reaches deposits that have cleared and are available for the taxpayer to withdraw.

Answer: 

Answer by John Burnett: If you carefully parse the last sentence of the "officialese" that Randy has quoted, you'll see where the need for bank counsel comes in. For a banker, it's an established fact that "clearance" of a check and "availability" of the funds deposited by check are two separate concepts. Funds can be, and often are, made available before deposited checks have cleared, and it's established law that a bank has the right to charge back a deposited check that's timely returned unpaid even if the funds represented by the check had previously been made available and withdrawn.

For the record, I agree with Ken. If, during the 21-day holding period under an IRS levy, a check deposited to the account before the levy is returned unpaid, you'd have the right to reduce the amount due the IRS, if necessary, to recover the funds.

First published on BankersOnline.com 5/27/13

First published on 05/27/2013

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