If your business falls behind on its taxes, it faces IRS tax collection actions just like an individual would. This means there’s potential for tax liens and levies on your business’s assets. These collection actions could risk the continued operation of your business, especially if the IRS levies a business bank account.
If the IRS levies your business’s bank account, your business may not have sufficient cash to handle its day-to-day liabilities, such as paying vendors, meeting lease payments, or making payroll.
The good news is that a business bank levy doesn’t usually occur overnight. Read on to learn more about what happens before the IRS takes money from your business bank account and what you can do to stop it from happening. In some cases, you can handle things yourself, but if you’d like additional assistance, contact the licensed tax professionals from 20/20 Tax Resolution.
Key Takeaways
- When the IRS can levy business bank accounts – The IRS typically levies a business bank account when attempting to collect a business tax debt, when the alter ego doctrine applies, or when the business and individual taxpayer are the same legal entity.
- The start of the tax collection process – After the IRS assesses a tax and sends a bill, if the business doesn’t make arrangements to pay the tax, the IRS will send a series of notices and levy warning letters.
- The bank levy begins – If the business still doesn’t address the underlying tax debt, the IRS will send Form 668-A to the bank telling them to freeze the business bank account, then remit the funds from that account to the IRS in 21 days.
- Stopping a bank levy – There are several ways to stop a bank levy, but some of the more common methods include paying the full tax balance, making payment arrangements with the IRS, or challenging the validity of the tax debt or levy.
How a Business’s Funds Could Be at Risk
When it comes to business tax levies, the IRS often focuses on bank accounts instead of other assets, such as real estate, vehicles, equipment, or inventory. This is because bank accounts are easier to seize and apply to unpaid tax balances.
The IRS will generally go after a business’s assets (including its bank accounts) in three primary situations:
- Business Tax Debt Collection
- Alter Ego Situation
- Individual Tax Debt Collection
Business Tax Debt Collection
If a business is a legally separate entity from its owners (for example, an LLC or corporation), then only that business’s property can be used to satisfy that business’s tax debts. In other words, the IRS isn’t allowed to go after the personal assets of that business’s owners, officers, or employees. This is due to the liability protection that comes with creating a business that’s legally distinct from its owners and operators.
Two common exceptions to this rule come up with the Trust Fund Recovery Penalty and an alter ego situation.
The Trust Fund Recovery Penalty
When a business doesn’t collect and remit trust fund taxes (withheld employment and income taxes), the IRS can go after not just the business itself, but also anyone responsible for not paying the trust fund taxes. To do this, the IRS assesses a Trust Fund Recovery Penalty (TFRP) against one or more responsible individuals.
The IRS can collect the TFRP from anyone who has the power and authority to collect or pay trust fund taxes but intentionally fails to do so. This right of recovery applies even if the business shuts down, and the responsible person must pay this penalty from their personal funds. If this penalty is assessed against multiple people, they have joint and several liability.
The Alter Ego Doctrine
The alter ego doctrine allows the law (such as the courts and the IRS) to ignore the legal separation between a business and its owner(s) to prevent an unfair, fraudulent, or abusive outcome.
For example, an individual might set up a business so that the individual-owner is able to extract all of the business’s profits, while the business remains legally responsible for the debts. Then, when those debts come due, the business has no money to pay them, as all the money went to the owner. The business’s creditors have no choice but to take their losses because the business owes the debts, not the individual owner.
In the above scenario, a court might use the alter ego doctrine to treat the unscrupulous owner as the same legal entity as the business for purposes of debt collection. The alter ego doctrine basically says that the business and the person are one in the same; they’re alter egos of each other. That premise allows the IRS to pierce the corporate veil, meaning the liability protections of the corporation or the LLC no longer apply.
Business Bank Account Seizure for Individual Tax Debt
If an individual connected to the business (such as a business owner) owes taxes to the IRS, the business’s property could be at risk if the business owner and the business itself are the same entity for tax collection purposes. A common example of this is a sole proprietorship.
Beyond that, however, your share in a business is considered to be your asset. If you owe individual tax debt and don’t make payment arrangements, the IRS could go after your shares in a business – and if you own 100% of a company, its bank accounts or other assets may be a fair target if the IRS is seizing your assets.
How an IRS Bank Levy Works
After the IRS assesses a tax against the business, the IRS will send a tax bill (Notice and Demand for Payment) to that business. If the tax bill goes unpaid, the IRS will send a series of letters and notices, which can include:
- CP14
- CP501
- CP503
- CP504
- Letter 1058 or LT11
CP504, Letter 1058, LT11 are notable here because they warn about a possible levy if the tax bill isn’t paid or other payment arrangements aren’t made to resolve the unpaid tax matter.
The next step involves the IRS sending Form 668-A (Notice of Levy) to the bank that has the business’s bank accounts. This form tells the bank it needs to freeze the funds in the business bank account and wait 21 days before sending the money to the IRS.
During this waiting period, the business will receive notification about the impending levy. This is effectively the last chance the business has to stop the levy, whether it’s by challenging the levy itself or finding a way to settle the tax debt.
How To Stop a Business Bank Levy
The available methods for stopping a business bank levy depend on several variables, including the size of the tax debt, the reasons for stopping the levy, and the overall financial health of the business. That being said, there are six primary ways to stop an IRS business bank levy.
Method #1: Pay the Full Tax Balance
This is the most straightforward and fastest way to stop an IRS tax levy, but it’s often the most difficult. After all, if your business had the cash to immediately pay the entire tax balance, the tax collection process probably wouldn’t have gotten to the point of a bank levy.
Method #2: Challenge the Levy’s Validity
Another way to stop a bank levy is to contend that there’s something deficient with the levy. One potential argument is to attack the validity of the tax debt itself, such as the statute of limitations for collecting that debt having expired.
Another possibility is identifying a procedural deficiency with the tax collection or levy process, such as not having received a required notice. You can present these arguments if you file an appeal, such as by requesting a Collection Due Process hearing.
Method #3: Show that Releasing the Levy Will Help Pay the Tax Debt
A business levy can be particularly troublesome because it could hinder the business’s ability to turn a profit. For instance, if the frozen bank account means employees or vendors don’t get paid, it could result in people quitting and/or lost clients. In the long run, this could result in business closure, making it harder for the IRS to recover the full unpaid tax balance.
By arguing that a levy release will allow the business to continue operating and, therefore, produce profits that can then be sent to the IRS, the IRS could be convinced to release the levy. These arguments are hard to make, and you should contact a licensed tax professional to help you.
Method #4: Enter Into a Tax Settlement Arrangement with the IRS
This is one of the more popular ways to stop a levy because it doesn’t require full payment of the tax debt, and most businesses are eligible for at least one tax debt resolution option. Some of the more popular options include:
- Offer in compromise (OIC)
- Currently Not Collectible (CNC) status
- Payment plan or installment agreement
Method #5: Prove Economic Hardship
This method primarily applies to sole proprietorships because it relies on the premise that the tax levy will create an unfair or unreasonable economic hardship on the taxpayer. And due to this hardship, the taxpayer can’t afford to pay for basic living expenses.
Method #6: Explain How the Levy Isn’t Necessary
The IRS will often agree to release a levy if the business can show that the value of the levy exceeds the total tax debt and the levy’s release won’t prevent the IRS from collecting the full tax debt.
Some of these options you or someone else from your business can probably handle on your own. But if the tax debt is sizeable, or involves complex tax issues (like payroll or trust fund taxes), then it’s probably a good idea to consult with a tax professional.
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We Are Committed To Finding SolutionsLearn MoreGet Professional Tax Help if the IRS Tries to Seize Your Business’s Bank Accounts
When there’s a pending levy of your business’s bank accounts, time is of the essence. Your business’s continued existence, as well as the livelihoods of its employees, are at risk if you don’t act quickly. Luckily, there are immediate steps you can take to stop the levy and halt aggressive IRS collection actions.
However, you might need the services of a licensed tax professional, such as one from 20/20 Tax Resolution. To schedule a free consultation, contact us online or call 1-800-363-5054.
Business Bank Levy FAQs
Can the IRS levy a business bank account if only the owner owes the back taxes?
It depends. If the tax debt is a personal one and the business is a separate legal entity (both legally and practically) from the owner, then most likely, the IRS can’t take money from the business bank account. However, if the IRS views the business as an “alter ego” of the owner (or vice versa), then it’s possible for the IRS to seize the money in the business bank account.
Can the IRS levy personal bank accounts for business tax debts?
Not usually, assuming the business and business owner(s) are legally distinct entities. One major exception is when the alter ego doctrine applies such that the IRS treats the business and the individual as the same legal entity for tax collection purposes.
Can the IRS go after a business’s bank account for the TFRP?
It’s complicated. Even though the Trust Fund Recovery Penalty can be assessed against one or more individuals, the IRS may still try to collect the unpaid trust fund taxes from the business itself. Additionally, the IRS may seize funds from the account if the business bank account is considered to be an asset of one of the individuals against whom the penalty was assessed.
Sources
– https://www.irs.gov/irm/part5/irm_05-017-014#idm139921008282176
– https://www.irs.gov/irm/part5/irm_05-017-002#idm140249336258464
– https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/ARC16_Volume1_MLI_10_TrustFund.pdf
– https://www.irs.gov/businesses/small-businesses-self-employed/what-is-a-levy
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