The IRS has broad legal authority to collect unpaid taxes. That includes taking funds directly from a business bank account – but only after taking legally required steps and providing proper notice. As a business owner, you need working capital, but the money in your bank account may be at risk if you owe the IRS money.
If you’re receiving warning letters, have steadily growing tax debt, or have already had your funds frozen, taking action now is crucial. Learn more about when the IRS can seize business funds, your resolution options, and how to protect your business’s money. When you’re ready to discuss your tax matters in greater detail, call Wiggam Law at (404) 233-9800.
Key Takeaways
- The IRS can seize business funds for business tax debt and, in certain situations, personal tax debt.
- Once funds are frozen, you have 21 days to resolve the tax debt before the funds are sent to the IRS.
- Recovering money after it’s been transmitted to the IRS is far harder than stopping a levy from happening.
- There are various resolution options, including installment agreements and offers in compromise.
When Business Funds Are At Risk
There are several situations in which your business funds may be seized. If any of these sound a little too familiar, it’s time to talk to a tax professional and take action.
Business-Related Taxes Are Past Due
Past-due business taxes are the most common trigger for frozen business funds. Income tax, payroll tax, and other business-related taxes put the business’s assets, accounts receivable, and bank accounts at risk.
While the IRS does take action to recover unpaid income tax, the agency is considerably more aggressive when it comes to unpaid trust fund tax, which includes federal excise taxes and taxes withheld from employee paychecks. When a business does not remit payroll tax, it is mishandling funds that it was required to hold in trust for the government. As a result, the IRS may take action to recover that money more quickly.
You Have Ignored Several Notices
It isn’t just a matter of owing the IRS money – it’s also about not taking action to resolve that debt. When the IRS’s automatic systems identify an unpaid debt, they start sending out past-due notices that gradually increase in urgency. These notices generally arrive four to six weeks apart, which means it often takes months for the IRS to actually move forward with a levy.
Even if you fall behind on your mail, the last notice the IRS sends before levying your bank account is sent by certified mail. However, if the IRS doesn’t have your correct address, you may miss this notice, and the IRS can still move forward with the levy. If you do not respond to notices or contact the IRS to set up payment arrangements, they can only assume that you are ignoring your tax liability and won’t pay unless forced to.
You Are Personally Liable for Taxes and Commingle Your Funds
In some situations, your business account could be seized to cover your personal tax debt. Business owners may choose an LLC or corporate business structure because it shields their personal assets from a business’s tax liability. However, even if a business entity typically protects personal assets, there are ways that the IRS can pierce the corporate veil and hold a business accountable for an individual’s tax debt.
This generally happens when the IRS believes that the business is an “alter ego” that can effectively stand in for the individual or that is solely an extension of the individual. If your individual finances are commingled with your business finances, that may also allow the IRS to seize company funds. Commingling often occurs when you use a business account for your personal purchases, use a business account as a personal slush fund, or use all of your accounts for both business and personal purchases.
You Have Not Filed Business Tax Returns
Not filing your business tax returns does not stop taxes from being formally assessed. If you don’t file when you are supposed to, the IRS will send out multiple reminders encouraging you to file your returns. If you don’t, they will move forward with a Substitute for Return that estimates what you owe.
The estimate is in the IRS’s favor, so it’s likely higher than what you would owe if you filed the return yourself. If you still don’t respond after they file an SFR, they will assess the debt and begin collection procedures as they would for any other tax debt.
You Have Defaulted on a Payment Plan
Perhaps you were on an installment agreement for your business tax debt and defaulted on it, either by failing to make your monthly payments or by accruing additional delinquent tax debt. When a taxpayer defaults on a payment plan, the IRS may be more aggressive when it comes to collections in order to avoid further nonpayment.
IRS Levy Timeline
While you may feel blindsided by a business bank account levy, these levies only occur after months of ignored notices and IRS letters. This is what you can expect when the IRS begins its standard collection process:
- Balance due notice: The IRS’s first notice is CP14. This is just a standard bill indicating what you owe, what your payment options are, and how your tax debt is split up between taxes, interest, and penalties.
- Reminder notices: If you do not respond to CP14, the IRS may proceed with CP501 about four to six weeks after, and then CP503 four to six weeks after that. These notices are slightly more urgent in their tone, reminding you that you have not made payment arrangements and that the IRS may proceed with other collection actions if you don’t resolve the issue.
- Intent to levy: CP504B is a notice indicating that the IRS is planning on moving forward with a levy due to continued nonpayment of business taxes and a lack of responses to their notices.
- Final notice: The final step before an actual levy is the Final Notice of Intent to Levy and Notice of Your Right to a Hearing. There are several variations of this, including LT11, Letter 1058, CP90, and CP297. This satisfies the IRS’s legal requirement to give you a 30-day warning before they levy your assets.
- Levy: If 30 days pass without any payment after your final notice, the IRS may levy at any time.
How an IRS Bank Levy Works
A bank levy is a legal seizure of funds. Several things must occur before a levy is executed:
- The IRS sends Form 668-A to your bank: The IRS uses this form to notify third parties that they are seizing assets belonging to a delinquent taxpayer. In this case, it notifies your financial institution that it must freeze the funds currently in your account.
- The bank freezes your funds: The bank freezes your funds, which means you cannot withdraw them, use them to pay bills, or otherwise access them. This freeze lasts for 21 days.
- The bank sends the money to the IRS after 21 days: If the tax issue is not resolved during this 21-day period, the bank sends the frozen funds to the IRS. The levy only applies to money in the account at the time that funds are frozen, but the IRS may levy future deposits as needed. Once the funds are transferred to the IRS, recovering them is significantly harder.
How Small Businesses Are Impacted
While every business is hit hard by frozen funds, small businesses often suffer the most. Large corporations may have multiple bank accounts, and while the IRS can levy multiple bank accounts, it’s likely that large corporations will have untouched accounts or credit lines they can use to get by while they resolve the tax debt.
In comparison, a small business losing access to its money can no longer make payroll, purchase inventory, pay its bills, or maintain vendor relationships.
Not only does this sour the relationships an employer has with its employees, vendors, and clients, but it also puts them at risk of legal action. Labor boards aggressively pursue unpaid wage claims, and a business that misses even one pay cycle due to frozen funds could be hit with massive penalties and lose its employees entirely. Vendors and service suppliers are likely to end working relationships if a business is unreliable with payments, and if a missed payment means a contract violation, the business may also face a lawsuit.
When you look at all of these consequences together, you also see that they severely damage a business’s reputation in the community. People are less likely to patronize, work at, or recommend a business that is known for having cash flow issues and tax concerns.
Stopping or Releasing a Bank Levy
If the IRS threatens to levy your account or actually levies your account, you must take immediate action. The sooner you begin looking into payment options and showing the IRS that you are willing to work with them, the more options you have available to you. Once the funds have been taken out of your account, you have far fewer options, and recovering your money takes much longer.
Set Up an Installment Agreement
An installment agreement is one of the most convenient ways to avoid a lien. Here are the main options for businesses:
- In-business trust fund express – up to two years to repay up to $25,000 in payroll taxes; no financials required if you meet criteria.
- Streamlined installment agreement – up to six years to pay up to $25,000 in payroll tax debt if you’re still operating; or up to $25,000 on any type of business tax debt if you’re no longer operating (up to $50,000 for out-of-business sole props).
- Financially verified – if you don’t qualify for the other options, you may be able to set up payments at the IRS’s discretion if you provide financial details.
Request an Appeal Hearing
If you’re still within the window where you can request a Collection Due Process hearing, this may allow you to dispute the amount owed or the collection actions being taken against you. If you’ve missed the deadline, you may still be able to request an equivalent hearing or consider the Collection Appeal Program (CAP). Consult with an attorney for the best option.
Negotiate Another Monthly Payment Arrangement
A Partial Payment Installment Agreement may be a viable option if you can make monthly payments, but can’t quite afford the minimum amount needed to pay the debt off in full by the Collection Statute Expiration Date.
Request an Offer in Compromise
The IRS does accept applications for offers in compromise from business taxpayers. The acceptance rate is low, but if paying in full would create financial hardship, it’s an option worth exploring with a tax professional.
Address Unfiled Returns Immediately
If your tax debt is the result of unfiled returns and Substitutes for Returns, filing past-due returns immediately could help you decrease what you owe. Once you file your own returns, accounting for any deductions or credits, your tax debt may decrease enough to make other resolution options available to you.
Resolve Payroll Tax Issues
If your tax debt comes from both income tax and payroll tax debt, tackling the payroll tax debt could give you some breathing room. This is a high-priority debt for the IRS, because payroll taxes are trust fund taxes. Working with a tax professional can help you address your different forms of tax debt most effectively.
Why Business Bank Accounts Are a High-Risk Target
Bank levies are an effective collection method for the IRS. If they garnish wages, they have to wait for the allowed amount to trickle in with each paycheck. If they place a lien on assets, the debt is only addressed when the taxpayer needs to sell or refinance the assets in question. In comparison, a bank levy gives the IRS cash right away after the 21-day window passes.
When It’s Time to Talk to a Tax Attorney
Contact a tax attorney immediately if:
- Your funds are frozen right now.
- The IRS has sent you a Final Intent to Levy
- You’ve received a CP504B, which means the next notice is going to be a Final Notice of Intent.
- You owe payroll taxes.
- You owe business taxes and want to make a plan before the IRS escalates.
A business bank account levy threatens your livelihood and the continued success of your business. Be proactive and take action now to resolve the issue before the IRS levies your account. Call Wiggam Law at (404) 233-9800 to discuss your concerns with our team and come up with an effective plan that gets you back into compliance. Or request a consultation online now.
Frequently Asked Questions
Can the IRS take business funds for personal tax debt?
The IRS may seize business funds for personal tax debt if there’s evidence that funds are commingled or if the business serves as an alter ego for the individual.
Can the IRS levy my account more than once?
Yes. A bank account levy only extends to the funds in the account at the time that the funds are frozen. They can continue issuing levies until the tax debt is paid off.
What if I have a joint account with a business partner?
The rules around bank levies on joint accounts can be complicated, but the IRS can often levy joint accounts even if just one person owes the taxes.
Does an installment agreement stop a levy?
An installment agreement can stop a levy, but only if a plan is accepted and if you comply with it. If you fall out of compliance and default, the IRS may resume collection activities.
The IRS has already taken the money after the 21-day hold; can I get it back?
It is technically possible to recover funds in this situation, but it is much more difficult than stopping a levy from occurring in the first place.
Sources
https://www.irs.gov/individuals/understanding-your-cp14-notice
https://www.irs.gov/individuals/understanding-your-cp501-notice
https://www.irs.gov/individuals/understanding-your-lt11-notice-or-letter-1058
https://www.irs.gov/businesses/small-businesses-self-employed/levy
https://www.irs.gov/businesses/small-businesses-self-employed/how-do-i-get-a-levy-released
https://www.irs.gov/businesses/small-businesses-self-employed/what-if-a-levy-is-causing-a-hardship
https://www.irs.gov/businesses/small-businesses-self-employed/information-about-bank-levies
https://www.irs.gov/payments/payment-plans-installment-agreements
