Our bank received a tax levy notice regarding a customer’s account. As we went through the process of preparing to hold the funds, the levy was released. Can our bank still charge a processing fee related to responding to the levy notice?

We are not aware of any Illinois law that would prevent your bank from charging this fee, provided that your customer has agreed to this type of fee in the account agreement. Under the Illinois Banking Act, the setting of account fees is a business decision, subject to the terms established in the account agreement. We recommend reviewing your account agreement to determine whether any of its provisions address fees for responding to legal process (including tax levies).

Note that if a customer incurs a fee due to an erroneous levy, the IRS has a process for the customer (the taxpayer) to seek reimbursement from the IRS.

Also, we note that the Illinois Banking Act provides for banks to be reimbursed for reasonable costs that have been directly incurred when searching for, reproducing or transporting books, papers, records or other data of a customer that is required or requested to be produced pursuant to a lawful subpoena, summons, warrant, citation to discover assets, or court order. While tax law is outside our scope of expertise, we understand that some tax levies may be issued by an order of the court. Consequently, your bank would be entitled to reimbursement for its costs incurred if responding to a levy issued pursuant to a court order.

For resources related to our guidance, please see:

Illinois Banking Act, 205 ILCS 5/5e(b) (“The establishment of account service charges and the amounts of the charges not otherwise limited or prescribed by law is a business decision to be made by a bank according to prudent business judgment and safe and sound operating standards. In establishing account service charges, the bank may consider, but is not limited to considering, the costs incurred by the bank, plus a profit margin, for providing the service, the deterrence of misuse of the bank’s services, the establishment of the competitive position of the bank in accordance with the bank’s marketing strategy, and the maintenance of the safety and soundness of the bank.”)

IRS Policy Statement 5-39 (01-13-2011) (“1. Reimbursement of Bank Charges Due to Erroneous Levy and Service Loss or Misplacement of Taxpayer Checks, or Direct Debit Installment Agreement Processing Errors. 2. The Service recognizes that there are circumstances when an erroneous use of its unique enforcement powers may cause taxpayers to incur certain bank charges. 3. Taxpayers who incur bank charges due to an erroneous levy or a Direct Debit Installment Agreement (DDIA) processing error on the part of the Service may file a claim for reimbursement of those expenses. 4. Bank charges include a financial institution's customary charge for complying with the levy instructions and charges for overdrafts that are a direct consequence of an erroneous levy or DDIA processing error on the part of the Service. 5. In addition, there are times when a taxpayer's check may be lost or misplaced in processing. When the Service asks for a replacement check, the taxpayer may be reimbursed for bank charges incurred in stopping payment on the original check. The charges must have been paid by the taxpayer and must not have been waived or reimbursed by the financial institution.”)

Illinois Banking Act, 205 ILCS 5/48.1(g) (“A bank shall be reimbursed for costs that are reasonably necessary and that have been directly incurred in searching for, reproducing, or transporting books, papers, records, or other data of a customer required or requested to be produced pursuant to a lawful subpoena, summons, warrant, citation to discover assets, or court order. The Commissioner shall determine the rates and conditions under which payment may be made.”)

Internal Revenue Code, 26 USC 6331(a) (“If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.”)

Illinois Income Tax Code, 35 ILCS 5/1101(a) (“If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the State of Illinois upon all property and rights to property, whether real or personal, belonging to such person.”)