There are dozens of issues that have to be recognized, discussed, and planned for… before a bankruptcy is filed. For people with IRS debt and an IRS lien, the issue of avoiding IRS seizure of a retirement account after bankruptcy is a big one.
First, some background:
When you owe the IRS money, it will record a notice of federal tax lien with the county recorder's office depending on the size of the debt and what you are doing to resolve it.
This put's everyone on notice that it is on the list of secured creditors you may have.
Most retirement accounts (401k, IRA, Pensions) are safe or exempt in bankruptcy from creditors and from the bankruptcy trustee.
But…if the underlying IRS debt is discharged in bankruptcy or wiped away and the IRS has properly recorded the lien notice prior to that bankruptcy filing, that lien notice gives the IRS the right to seize assets you owned on the date you filed the bankruptcy, after the bankruptcy is over, even retirement accounts potentially.
Without the tax lien notice recording, the IRS can't touch the assets if the tax debt obligation was discharged in the bankruptcy.
Release of the recorded IRS lien post bankruptcy is discretionary with the IRS. If assets are minimal it will typically agree to release the lien. If they aren't it typically won't
Defenses to seizure of the exempt retirement account post bankruptcy
The IRS “stands in your shoes” defense
The IRS has the same right to your property that you do. If you can't get to an asset… neither can the IRS. This is true pre-bankruptcy or post bankruptcy.
Many people don't have access to their retirement account at work until they no longer have the job, are disabled, or they die. The IRS can have the lien on the account, but it just can't enforce it unless you gain access to the account.
As a result, many people simply wait out the IRS after the bankruptcy discharge by staying at the job until the statute of limitations on collection runs out on the lien. (The IRS has 10 years to collect. Once that time runs out the lien has to be released)
The “IRS must consider other alternatives defense”
The IRS doesn't like to take retirement accounts. It makes for bad publicity and it considers it to be bad public policy. It also doesn't like to take retirement accounts where the conduct of the taxpayer wasn't necessarily bad i.e. the retirement account was mostly funded prior to the tax debt's existence.
The IRS is required to consider alternatives as a result. One alternative may be a payment plan, another may be a settlement of the original amount in exchange for the lien's release.
The “I need the money to live defense”
Sometimes people are able to show the IRS that the money in the retirement account is or will be necessary for them to pay basic living expenses. As the IRS is reluctant as a matter of public policy to put people on the street, where some asset is necessary to pay basic/necessary expenses like reasonable housing, food, basic transportation and medical expenses, the IRS will usually leave the the asset alone.
IF you are facing a bankruptcy, or have finished one and are in this unique situation, keep the above in mind when speaking with the IRS revenue officer assigned to determine whether to seize your retirement account.