The IRS has the federal authority to impose a tax levy to collect outstanding tax balances. In these situations, taxpayers' and business owners' property may be up for grabs and sold at auctions to cover the back tax debt. However, the IRS does not have the authority to take everything a person owns. Here's a look at which accounts are subject to an IRS levy.

When Does the IRS Issue a Levy?

A tax levy is only issued when the taxpayer has made no effort to pay an outstanding tax debt. The IRS sends several warning letters and notices before imposing a levy. Generally, the taxpayer receives a "Notice and Demand for Payment", which is issued several months after the filing deadline. After some time, the IRS will send out a final notice called the "Final Notice of Intent to Levy and Notice of Your Right to a Hearing."

Upon receiving this notice, a taxpayer has 30 days to either clear his or her account or contact the agency about making an installment plan. If no action is taken, the levy will proceed.

Which Assets are Subject to a Levy?

According to the law, the IRS can levy any property in which the taxpayer has an interest. This can apply to property that the individual personally holds such as homes, vehicles and jewelry. It can also apply to property that is owed to you in the future such as retirement account funds, future wages and rental income.

The only type of asset that is specifically excluded from a levy is an asset that was not owned by the taxpayer at the time. For example, if a person adds more money to a bank account after the levy is enforced, that money will not be subject to the levy.

How to Protect Your Accounts

The best way to protect your accounts from an IRS levy is to never incur a tax debt at all. If you are employed, examine your withholding certificate each year to see if you should claim fewer allowances or adjust your filing status. If you work for yourself, use last year's return as a guide to estimate your tax liability. Then, divide the total by four and send it in installments to cover your quarterly estimated taxes.

If you owe a balance at tax time, either pay it in full or set an installment plan right away. If you run into financial difficulties, contact the agency immediately to work out a revised plan. It's also important to take action quickly to avoid accruing interest and penalties on the balance. Even if you're able to avoid the IRS levy, your tax bill can quickly balloon if you owe additional fees.

No one wants to deal with the consequences of an IRS tax levy. If you communicate with the agency promptly and do your best to pay your tax balance on time, you may never have to worry about which of your accounts is subject to an IRS levy.