What backup withholding is and why it happens

Backup withholding is when your bank removes a percentage of money from your savings account and sends it to the IRS (Internal Revenue Service). It is not a penalty or a freeze — it is a tax collection method the IRS uses when you have not provided your correct tax identification number or when you have underreported income on your tax returns.

The IRS initiates this, not your bank. Your bank receives a notice from the IRS telling it to withhold, and your bank is legally required to follow that instruction. The amount withheld is typically 24% of the funds in your account, though the exact percentage can vary depending on the type of income involved.

This is different from a bank freeze or account hold. With backup withholding, money actually leaves your account and goes to the federal government. You do not lose access to the funds permanently — they are credited toward your tax liability — but they are gone from your account when ready.

Key Takeaways

  • Backup withholding happens when the IRS sends your bank a notice, usually because you did not provide a correct tax ID number or underreported income.
  • Your bank must follow the IRS notice and will withhold 24% of the funds in your account, though you keep the right to withdraw remaining money.
  • The IRS typically notifies you in writing before backup withholding begins, giving you a chance to correct the problem.
  • You can stop backup withholding by providing your correct tax identification number or resolving the income reporting issue with the IRS.

The most common reasons backup withholding starts

The IRS issues a backup withholding notice most often when you have not given a bank or employer your Social Security number or Individual Taxpayer Identification Number (ITIN). If you opened a savings account and the bank asked for a tax ID number but you did not provide one, or provided an incorrect one, the IRS can order backup withholding.

The second common reason is underreporting. If the IRS receives a report from an employer, investment company, or other payer showing income you did not report on your tax return, they may issue a backup withholding notice. This includes situations where you received a 1099 form (a record of income paid to you outside a regular job) but did not include that income on your return.

A third reason is if you previously had backup withholding and did not resolve the issue. Once the IRS removes the notice, backup withholding stops, but if you do not follow through on correcting the underlying problem, it can restart.

How to know if backup withholding applies to you

The IRS sends written notice before backup withholding begins. You will receive a letter explaining why the IRS is ordering the withholding and what you need to do to stop it. This letter comes to your address on file with the IRS, so if you have moved recently, check your mail carefully or contact the IRS to confirm your current address.

Your bank may also notify you when it receives the IRS order. Some banks send a separate notice; others include it in your regular statement. If money suddenly disappears from your account and you did not authorize a withdrawal, check your statement for any notation about withholding or contact your bank directly to ask whether an IRS notice has been received.

You can also contact the IRS directly at 1-800-829-1040 to ask whether backup withholding has been ordered on your account. Have your Social Security number or ITIN ready when you call.

Steps to stop backup withholding

The action you take depends on why the withholding started. If the issue is a missing or incorrect tax ID number, you need to provide the correct number to your bank and to the IRS. Contact your bank's customer service and ask how to update your tax identification information. You will likely need to provide your Social Security number or ITIN and may need to sign a form.

Once your bank has the correct number, it will send that information to the IRS. The IRS will then issue a notice to your bank to stop the withholding. This process typically takes a few weeks.

If the issue is underreported income, you have two options. You can file an amended tax return (Form 1040-X) that includes the income you missed, or you can contact the IRS to dispute the income report if you believe it is incorrect. If you file an amended return, send it to the IRS address shown in the instructions for that form. If you dispute the income, contact the IRS at the number on your backup withholding notice.

In either case, keep copies of everything you send to the IRS and note the date you sent it. The IRS will review your response and issue a notice to your bank to stop withholding once the issue is resolved.

What happens to the money that was withheld

The money the IRS withholds is credited toward your federal income tax liability. When you file your next tax return, the IRS will count the withheld amount as a payment you made. If you owe taxes, the withholding reduces what you owe. If you do not owe taxes or owe less than the amount withheld, you will receive a refund.

You do not have to do anything special to claim the withheld money — the IRS handles this automatically when processing your return. However, if you believe the withholding was done in error, you can contact the IRS to request a refund before filing your return.

The difference between backup withholding and other account holds

Backup withholding is not the same as a bank freeze or a hold placed by a creditor. A bank freeze typically happens when a court orders it (for example, if you owe a judgment debt) or when the bank suspects fraud. A hold is when your bank temporarily prevents you from withdrawing funds while it verifies a deposit or investigates a transaction.

With backup withholding, you can still withdraw money from your account — the IRS is straightforward taking a percentage of what is there. With a freeze, you cannot withdraw anything. With a hold, you cannot withdraw the held amount but can withdraw other funds. If you are unsure what is happening to your account, ask your bank directly whether it is a backup withholding order from the IRS or a different type of restriction.

Frequently Asked Questions

Can backup withholding happen to a joint account?

Yes. If the IRS issues a backup withholding notice for one account holder, the bank will typically withhold from the entire account balance, even if the other account holder did not cause the problem. If you share an account with someone and backup withholding is ordered, contact the IRS when ready to resolve the issue, as it affects both account holders' access to the funds.

Will backup withholding affect my credit score?

No. Backup withholding is a tax matter between you and the IRS, not a debt or payment default. It does not appear on your credit report and does not lower your credit score. However, if the underlying issue (such as unpaid taxes) remains unresolved for years, that could eventually affect your credit.

What if I do not agree with the income the IRS says I earned?

You can dispute it. Contact the IRS using the phone number on your backup withholding notice and explain why you believe the income report is wrong. You may need to provide documentation, such as a letter from the payer saying the amount was incorrect. The IRS will investigate and either confirm the amount or issue a corrected notice to your bank.

How long does backup withholding last?

Backup withholding continues until you resolve the underlying issue — either by providing your correct tax ID or by correcting the income reporting problem. Once resolved, the IRS sends a notice to your bank to stop, which usually takes a few weeks to process. If you do not resolve the issue, backup withholding can continue indefinitely.