When you owe money to the IRS, it’s typically a sign of a cash flow problem. As a business owner, you may have made the difficult decision to pay your staff and vendors before your taxes. While that may have seemed like the only path forward, failing to keep up with your tax obligations can land you in trouble–namely, an IRS levy on your business bank account.

Learn more about what power the IRS has over your bank funds, how a tax levy can impact the everyday running of your business, and what you can do to prevent a levy. For more business tax guidance and support, contact us at Seattle Legal Services today.

Key Takeaways

  • The IRS can levy business bank accounts if you owe federal taxes and have failed to respond to notices.
  • Payroll tax debts trigger faster action because they are “trust fund” taxes.
  • A levy freezes funds for 21 days before the bank sends them to the IRS. You won’t have access to money for payroll, business rent, and vendor payments.
  • Sole proprietors face double exposure because the IRS has the power to levy business accounts to collect personal tax debts.
  • Acting before the levy gives you more control over the outcome. A dedicated tax attorney can guide you through your options.

Can the IRS Really Levy Your Business Bank Account?

The short answer is “yes.” The IRS does have the legal authority to levy your business bank account if you owe federal taxes. This rule applies to you whether you’re a corporation, LLC, partnership, or even a sole proprietorship.

The IRS doesn’t have to sue you before taking this action. According to the Internal Revenue Code, the IRS has the legal right to use levies to collect delinquent tax from business owners. As long as you owe back taxes and the agency has followed the proper notification procedures, they can place a levy on your business bank account.

Once the levy has been placed, your bank must freeze your account and send the funds directly to the IRS after a 21-day holding period. You won’t be able to access your frozen funds during this time, although you can use the account for new deposits that come in.

When the IRS is Likely to Levy a Business Bank Account

The IRS is unlikely to levy your business bank account without substantial prior warning. Before the agency takes this step, they will have sent you a series of notices and letters letting you know about your unpaid taxes and highlighting the action they may take.

Should you fail to respond, the IRS may follow up with a Final Notice of Intent to Levy, typically Letter 1058, or LT11. You will then have 30 days to respond to the notice and make arrangements to pay your back taxes, or the IRS will move forward and levy your business bank account.

Not all tax debts instantly trigger a tax levy. However, there are specific instances when the IRS is likely to take this action to recover funds:

  • Unpaid payroll taxes: The IRS typically treats unpaid payroll taxes with a strong sense of urgency. These are known as “trust fund” taxes that are withheld from your staff’s paychecks. If you don’t pay these back taxes, a bank levy is likely.
  • Ignored collection notices: As we’ve covered, the IRS sends out a series of notices before levying a business bank account. If you don’t answer these, the agency may assume that you won’t resolve the debt yourself and take further action.
  • Defaulted payment agreements: When you’ve previously set up an installment agreement but haven’t kept up with the payments, this may trigger a bank levy. The IRS can move quickly in these situations to collection enforcement.

Understanding your risk of an IRS levy on your business account is important. Falling behind on your taxes happens, but it’s vital you take the steps to protect your business and finances.

The Sole Proprietor’s Double Jeopardy

Running a sole proprietorship can put your personal finances at risk when you owe back taxes. The IRS doesn’t distinguish between your personal assets and your business assets since, legally speaking, you and your business are one entity. That means the following:

  • Personal tax debt can put your business finances at significant risk.
  • The IRS has the power to levy your business bank account to recover personal taxes.
  • The IRS may also levy personal accounts for business tax debts, generally.
  • You don’t get the same protection on your personal assets as you would as an
  • incorporated business.

It doesn’t matter if the back taxes came from your personal tax return; the IRS can go after your personal and/or business accounts. That’s because if you’re a sole proprietor, your business is one of your assets, making it fair game for the IRS to target. That makes it all the more important to deal with the debt head-on. If you’re unsure where to start, contacting a tax attorney is a smart move.

Reasons the IRS May Hold Back from Levying

While the IRS has the legal authority to level business accounts, they may not do so immediately. There are times when the agency can, and often will, pause any collection activities. Let’s break down the main scenarios below:

  • You’re working toward compliance: If you responded promptly after receiving notices from the IRS, that is a good sign. Giving the agency the requested financial information and starting negotiations means that the IRS may hold off. If you’re unsure of how to do this, it’s worth reaching out to an attorney to navigate the process.
  • You’re pending an appeal: You may have requested a Collection Due Process (CDP) or Collection Appeals Program (CAP) hearing. While the appeal takes place, you should get an automatic pause on any collection activities, including levies. Note that CAP and equivalent hearings may stop a levy from moving forward, but may not necessarily stop an in-progress levy. Learn more about how to appeal a levy.
  • You can show you’re in financial hardship: In cases where a levy would stop you from meeting your basic expenses, the IRS may mark your account as Currently Not Collectible (CNC). This is a temporary measure, but it can give you time to recover as the IRS stops all collection actions when you’re in CNC status.

None of these protections is automatic, which means that you need to take action quickly. Working with the IRS gives you the best chance of getting a fair result. That means documenting your situation and filing the correct requests on time.

How a Levy Impacts Your Business Operations

If you miss the window and the IRS levies your bank account, the impact on your business will be swift. Since your funds are frozen, you can expect the following consequences:

  • Your payroll will fail. Without access to your business bank account, it’s likely that you won’t be able to run payroll. That means that you can’t pay your employees and run the risk of violating labor laws. Additionally, your staff members will be on your back.
  • You can’t pay rent or utilities. You also won’t be able to send funds to cover your business property rent or any utilities you owe. This puts your physical location at risk and may mean that you face painful consequences, such as your electricity being shut off.
  • You can’t pay contractors. If you are unable to pay contractors, it’s likely that they will suspend work. Should their work be essential to the everyday running of your business, that means that your operations will instantly slow down or even stop.
  • Vendor payments may bounce. If your payments to vendors bounce, you may not get the inventory you need. Many suppliers may refuse to extend your credit in this case.
  • Your reputation will suffer. The word may spread that you are facing financial difficulties or failing to pay staff and vendors. That type of stigma can follow your business for years to come. The sooner you deal with it, the better.

When the IRS levies your business bank account, it impacts more than just your immediate finances. This action can put the entirety of your business operations under serious pressure.

The Damaging Effect on Business Relations and Credit

As a business owner, you will have spent years building a strong reputation and forging

relationships. However, an IRS bank levy can put your hard work at risk.

Vendors that would have previously given you credit may request cash on delivery in the future. Your landlord may have doubts about whether you can pay next month’s rent. Your employees may be uncertain about the future of the business and update their résumés.

IRS levies may also impact your business banking relationship. For instance, some banks may choose to close accounts of businesses when they have a history of levies. That means that you will need to find a new bank, which may have higher fees or harsher restrictions.

Why Acting Early Can Change Everything

Burying your head in the sand is a mistake. Acting early gives you the option to resolve the IRS debt before the agency levies your business bank account. That gives you more control.

However, if you wait too long and the levy is in place, you will need to be on the defensive. You will have less room for negotiation since the IRS already has direct access to your finances. That puts you in the position of asking for money back, rather than working out fair terms.

Your business will also be under pressure as you may have to attempt to cover payroll from your own finances, explain the situation to vendors, and spend your time doing damage control.

Your Options to Stop or Prevent an IRS Levy

There are several ways you can prevent the IRS from levying your bank account or even stop a levy in its tracks when it’s already begun. Below, we look at your main options:

  • Installment agreements: The IRS may settle on an installment agreement with you, which will help you to pay off your tax debt over time. Having one of these agreements in place typically stops them from taking any levy action against your account.
  • Collection Due Process (CDP) appeals: You can challenge a proposed levy before it takes effect. Filing a CDP appeal in time means that the IRS will not put a levy on your bank account until the case has been fully reviewed.
  • Collection Appeals Program (CAP): A CAP is a faster way to dispute any collection action that may be proposed. However, there is no guarantee that the IRS will pause a levy while this type of review takes place.
  • Offer in Compromise (OIC): You may be able to settle your tax debt for less than you owe, so long as you meet the agency’s criteria. The IRS will take into consideration whether you have the ability to pay, your business income, expenses, and any assets you own.
  • Currently Not Collectible (CNC) status: If you can demonstrate that you’re in financial hardship, you may be eligible for the CNC status. This status is temporary, and doesn’t wipe out the debt. However, it may give you time to sort out your finances.

Of course, whichever option you decide to pursue, you need to meet the IRS’s requirements, deadlines, and follow the proper procedures. This can be tricky alone. Contact a dedicated tax attorney who can guide you through the process.

Protect Your Business Before It’s Too Late

If the IRS levies your business bank account, it can put your company at serious risk of shutting down. Acting before that happens is the best way to protect your business. However, if there’s already a levy on your account, you do have options. Working with a dedicated attorney is the answer.

Seattle Legal Services, PLLC, has experience helping business owners navigate their tax debts and get the best results. Call our team on 425-428-5262 or use our online contact form now.