The IRS Levied Your Business Account or Your Customers

Payroll is due Friday and the business account is frozen. Or worse, your best customer calls to say they received a notice from the IRS telling them to send your invoice payments to the government instead of to you. Either way, cash has stopped and the clock is running.

Business levies are serious, but they are not the end of the business. The rules give you a short window and several ways to get a levy released. Here is how these levies work and what I would do first.

Two kinds of business levies

A levy on the business bank account

The IRS serves a notice of levy on your bank. Under Section 6332(c) of the Internal Revenue Code, the bank must hold the funds and may surrender the deposits only after 21 days from service of the levy. That 21 days is your working window. A bank levy generally reaches the money in the account when it is served. It does not keep catching new deposits, but nothing stops the IRS from levying again. Section 6331(c) allows successive levies until the debt is paid. For the step-by-step on frozen accounts, see the 21-day bank levy hold.

A levy on your customers (accounts receivable)

The IRS can also levy money your customers owe you. The Internal Revenue Manual (IRM 5.11.6.8) lists accounts receivable among the assets that may be levied, including money owed by clients, customers, patients, insurance companies and tenants, and funds processed by credit card companies. The IRS sends a paper notice of levy, usually on Form 668-A, directly to the customer.

Two rules make this painful. First, under Section 6331(b), a levy reaches obligations that exist when it is served. The manual says it reaches future payments only if you already have a right to them, which is why revenue officers often serve levies on several customers and may serve them more than once. Second, your customers have strong reasons to comply. Under Section 6332(d), a customer who ignores the levy and pays you anyway can be personally liable for the amount, plus a penalty of 50% if it had no reasonable cause. Under Section 6332(e), a customer who pays the IRS is discharged from its obligation to you. Do not ask a customer to ignore a levy. They should not, and they probably will not.

Did the IRS have to warn you first?

Usually, yes. Section 6330 requires a notice of your right to a Collection Due Process hearing at least 30 days before the first levy for a tax period. For a business, that notice is often a Letter 1058 from a revenue officer or an LT11 from the IRS's automated collection system.

There is an important exception for payroll taxes. Under Section 6330(f)(3) and (h)(1), the IRS can serve a "disqualified employment tax levy" first and offer the hearing afterward if the business (or a predecessor) requested a CDP hearing about unpaid employment taxes arising in the two years before the period now being collected. Businesses that fall behind on payroll taxes a second time often lose the advance warning.

What to do right now

1. Find out exactly what was levied and for which periods. Ask the bank for a copy of the levy, and ask any customer who received one for a copy. The levy lists the tax type and periods. Check whether a CDP notice for those periods is still within its 30 days.
2. Request a CDP hearing if the window is open. If the CDP notice is less than 30 days old, file Form 12153. A timely request suspends levy action on those periods while the hearing is pending, under Section 6330(e). See your 30 days after a final notice of intent to levy.
3. Contact the revenue officer or the number on the levy immediately. Section 6343(a)(1) requires the IRS to release a levy in specific situations, including when you enter an installment agreement under Section 6159 (unless the agreement says otherwise), when release will help collect the debt, and when the property is worth more than the debt and a partial release would not hurt collection. Treasury Regulation 301.6343-1 gives examples of arrangements that can help collection, such as escrow, a bond, or paying the value of the government's interest in the property.
4. Get current on filing and deposits. The IRS will rarely agree to a payment arrangement for a business that is still falling behind. Unfiled payroll returns and missed current deposits are usually the first thing a revenue officer asks about.
5. Prepare a financial picture. Expect to provide bank statements, a profit and loss statement, a list of receivables and a financial statement. A revenue officer will not release a levy based on a phone call alone.
6. Ask about essential business property. If the IRS has levied tangible property you need to keep operating, such as equipment, Section 6343(a)(2) and Treasury Regulation 301.6343-1(d) provide for an expedited release decision, generally within 10 business days of a complete request. This applies to tangible property, not bank deposits or receivables.

A note on hardship

Under Treasury Regulation 301.6343-1(b)(4), the economic hardship release applies to an individual taxpayer who cannot pay reasonable basic living expenses. A sole proprietor is an individual and may qualify. A corporation or LLC taxed as a corporation is not an individual, so "the business cannot make payroll" is not by itself a hardship ground. Business owners in that position usually need an installment agreement, a release that facilitates collection, or another collection alternative.

What not to do

• Do not move money to a new account to dodge the levy. It rarely works, it damages your credibility with the revenue officer, and it can create bigger problems.
• Do not tell customers to pay you in cash or through a different entity. A customer who pays you after receiving a levy can be personally liable, and the IRS can pursue transfers to related entities.
• Do not skip payroll tax deposits to cover the gap. That deepens the hole and increases personal exposure for the owners.
• Do not ignore the revenue officer. Silence is how one levy becomes many, and how a levy becomes a seizure. If an officer has visited, read what to do when a revenue officer is at your door.

Preventing the next levy: trust fund taxes

Most business levies trace back to payroll taxes. When you withhold income tax and the employee share of Social Security and Medicare from wages, Section 7501 says that money is held in trust for the United States. Using it to pay rent or suppliers is the most common way businesses end up here.

It also creates personal liability. Section 6672 imposes the Trust Fund Recovery Penalty, equal to the full amount of the unpaid trust fund taxes, on any responsible person who willfully fails to collect or pay them over. That can include owners, officers and employees who control which bills get paid. Before assessing it, the IRS must send a preliminary notice at least 60 days before notice and demand, which the IRS issues as Letter 1153. If you receive one, read what to do about a Letter 1153 right away.

Practical prevention is simple to say and hard to do: make each federal tax deposit on time, keep the withheld taxes separate from operating cash, file every payroll return even when you cannot pay, and treat an IRS payment plan as a fixed expense.

Getting help

When the IRS levies a business, the goal is usually twofold: get enough cash released to keep operating, and put a realistic arrangement in place so the next levy never comes. That often means negotiating with a revenue officer on a tight schedule. Our office handles business collection cases and can review the levy, your filing status and your numbers with you. Reach us through GetIRSHelp.com or call (813) 229-7100.