The IRS has the duty to make sure you pay every cent that you owe in taxes. When you have an outstanding tax debt, the IRS will utilize a variety of collection methods to settle the amount.

If you are like many people, one of your most valuable assets could be your 401k retirement savings. You can negotiate with the IRS better when you learn how and when it can use your 401k to pay back what you owe to the government.

IRS Collection Methods

Before you worry about your 401k, you may be interested to know what other assets the IRS can take from you to settle your debt. In fact, it can pursue a number of different sources of income, most of which can be done without having to go to court and obtain an order for liquidation.

Some of the assets to which the IRS can levy include:

• your checking account
• your savings account
• investments, such as 401ks, IRAs, stocks, bonds, and CDs
• your wages, commissions, and other employer-based earnings

If your income from your employer is garnished, it could be months or years before the levy is released. Even more, the IRS does not have to abide by the typical rule of only claiming up to 25 percent of your income each pay period. It can effectively take as much as it deems appropriate until the debt is paid in full.

As noted, the IRS does not have to go to court and ask a judge for an intent to garnish or levy order. It can lay claim to your assets at a moment's notice if you owe a debt to the government.

401k Levies

You may have more money in your 401k than you do in any of your bank accounts. When you want to avoid having your wages garnished and settle what you owe to the IRS as quickly as possible, you may offer up the contents of your 401k.

Before you ask the holder of your retirement account to liquidate the amount, however, you should consider whether or not this would be in your best interest. If you liquidate the account, you will end up paying 10 percent in penalties. This penalty will reduce the amount that you want to pay toward your IRS debt.

Instead of you liquidating the 401k, you should allow and even encourage the IRS to invade the account for you. If it pursues the account, you do not have to pay the penalty. Further, the trustee of your 401k may offer up the account faster than if you were to ask for its contents to be released to you.

Some 401k trustees are not swayed by the IRS, however. If the company with which your retirement savings are invested refuses to offer up the money to pay off the debt, you must seek an alternative to settle the account.

Fresh Start Payment Arrangements

Under the IRS' Fresh Start program, you can set up a payment arrangement to pay off what you owe little by little. The payments are supposed to reflect what you earn each month and what you can genuinely afford to pay without hurting your household budget.

When you set up a payment arrangement, you hold off the IRS from garnishing you or seizing your liquid assets. You may, however, have to surrender your tax refunds each year until the debt is paid in full.

After the debt reaches its 10-year mark, you legally do not have to pay on it anymore and can ask the IRS to release you from your repayment obligation. The IRS cannot collect on debts that are more than 10 years old.

The IRS will actively go after any financial resources that you have in your possession to settle your back tax debt. You can decide if or when to offer up your 401k by learning about the IRS' collection methods and what assets it can legally levy.