One of the most potent governmental institutions in the US is thought to be the Internal Revenue Service (IRS). All taxpayers are affected, regardless of their income or financial situation. However, there are several forms of money that the IRS is prohibited from accessing, not even during an audit or collection action. Here’s a closer look at what funds are exempt from IRS collection efforts and how you may safeguard your assets. Accounts for Retirement
Money kept in qualified retirement accounts is one of the most significant sorts of money that the IRS cannot access. This covers pensions, IRAs, and 401(k) plans. These monies cannot be seized by the IRS in order to pay back taxes or other debts. However, keep in mind that you’ll probably have to pay a significant early withdrawal penalty in addition to income tax on the distribution if you take money out of a retirement account before you’re 59 1/2. Homestead Exemption
Homeowners who live in several states are entitled to a homestead exemption, which shields their primary residence from creditors. This exemption’s goal is to prevent homeowners from becoming homeless as a result of financial difficulties. While the homestead exemption is capped at a certain cash amount in certain states, it is limitless in others. However, keep in mind that if you owe unpaid taxes, the IRS may still place a lien on your house. Policies for life insurance
Money maintained in a life insurance policy is another sort of money that the IRS is prohibited from accessing. The IRS cannot take money from a life insurance policy that has a cash value in order to pay off a tax liability. It’s crucial to keep in mind that you can owe income tax on the policy’s cash value if you decide to surrender it. Keeping Cash Income a Secret Although the IRS cannot touch some forms of money, it is illegal to conceal cash income from the authorities. Even if you receive payment in cash, you must still disclose that income on your tax return. If you are detected, there may be fines and penalties for not doing so. However, there are legitimate ways to lower your tax obligation, such as by utilizing any available deductions and credits.
To sum up, the IRS is prohibited from accessing a number of financial assets, including retirement funds, homestead exemptions, and life insurance policies. It’s crucial to remember that these protections do not apply in all situations and that there may be exceptions. If you’re subject to an IRS audit or collection action, it’s wise to seek advice from a tax expert. And keep in mind that, despite the temptation, hiding cash income is not worth the chance of being discovered and subject to penalties and fines.