Published on: April 3, 2020

Understanding the Hardships for Businesses with an IRS Levy

Are you dealing with an IRS levy against one or more of your business accounts? You’re not alone. Each year, thousands of businesses who owe money to the IRS see their bank accounts or business accounts levied. Tax debts are incredibly difficult to fight. You can’t bankruptcy out of tax debt, and the IRS has more authority than 3rd party debt collectors to seize property and garnish wages without going through a lengthy lawsuit process.

So what happens if those levies are preventing you from meeting basic and reasonable living expenses? Getting out of an IRS tax levy isn’t easy. But it’s possible. There are multiple different arguments and legal strategies you can take to help you shake off those dreaded tax levies — especially if they’re causing you immediate economic hardship.

What Are IRS Levies?

The IRS defines a tax levy as “a legal seizure of your property to satisfy a tax debt“. In other words, a levy is an attempt to satisfy an owned tax debt. While the word “property” may have stuck out in the IRS definition, that term doesn’t only include vacation homes and land. The IRS levy can be put against your bank accounts, your wages, and even future tax returns. For businesses, the IRS can also put levies against business accounts, business equipment, subcontractor pay, and even accounts receivable. So a tax levy can have a significant impact on your business, your employees, and your ability to keep the lights on.

If your business has multiple creditors chasing after your property, the IRS will almost certainly be first-in-line for your assets. They don’t have to go to court and file a lawsuit. They have the immediate power (under Internal Revenue Code 6331) to put a levy against any property or right to property that you own outside of those properties are exempt by the IRC code.

Typical properties that the IRS will levy include:

  • Business accounts
  • Personal checkings or savings accounts
  • Retirement accounts
  • Salaries and wages
  • Accounts receivable
  • Subcontractor pay
  • Business equipment
  • Vehicles
  • Houses

Typical properties that the IRS will not levy include:

  • Workers’ compensation payments
  • Unemployment
  • Household goods (e.g., furniture, clothing, items, books, etc.)

What Is the Difference Between an IRS Levy and an IRS Lien?

A lien places a future claim against property that you own. Typically, liens are put on real estate. The IRS attaches liens to property to use as collateral against an outstanding tax debt, and you’ll be forced to pay your debt before you can sell or rent that property. It’s important to note that both liens and levies are public knowledge. You may find information about your lien or levy in the newspaper, and both liens and levies will be reported against your credit score.

In general, a lien is a future arrangement. With levies, the IRS is immediately attempting to secure your assets to pay for outstanding tax debt. While both can be devastating to businesses, the latter is generally viewed as the more severe option of the two.

For example, the IRS can put a lien against your vacation home. But that doesn’t mean that they are selling your vacation home to collect your tax debt. Instead, they are preventing you from selling or renting that home to others until your debt is cleared. It’s collateral. However, if the IRS put a levy against your vacation home, they’re planning on collecting on that home immediately — not further in the future.

How Do Businesses Incur IRS Levies?

Understanding the Role of Hardships for Businesses With an IRS Levy

To put it bluntly, you owe the IRS money that you haven’t been able to pay. You may have been recently audited, or you may have collected a series of letters without paying the IRS or setting up a payment plan.

Before your assets get levies, you will receive multiple warnings from the IRS. According to the IRS, these are the three criteria that must be met before they place a levy against one (or more) of your business accounts.

  1. The IRS has sent you a Notice and Demand for Payment (i.e., a tax bill).
  2. Sufficient time has passed since the Notice and Demand for Payment without payment — generally, four other letters will be sent to you during this time.
  3. The IRS will send you A Notice of Intent to Levy (CP90) document outlining their intent to levy your assets in 30 days.

The typical flow of these letters starts with a CP14, Status 21 Notice — which begins a five-letter sequence. The sequence is as follows:

  • Letter #1: CP14 (Notice and Demand for Payment)
  • #2: CP501
  • #3: CP503
  • #4: CO504
  • #5: CP90 (or A Notice of Intent to Levy)

Note: This is the standard IRS flow of letters. However, the IRS doesn’t specify that this flow has to be completed for every business, so there may be outliers.

If your business has received the first, second, third, or fourth letter, you should get in immediate contact with a tax pro to help you find a way to prevent a levy. If you’ve received the fifth letter, you have 30 days to reach out to a tax pro (the sooner the better) to help you resolve the levy before it becomes official. Once the levy has been placed, you still have options, but getting rid of the levy will be far more difficult and time-consuming.

How Can Your Business Avoid an IRS Levy

Obviously, the easiest way to avoid an IRS penalty is to pay your taxes, in full and on time. If you’re worried about your upcoming tax bill, now is a great time to connect with IRS tax experts for a consulting service. However, many businesses may be entirely unable to pay their amount due.

Luckily, the IRS provides a few tools to help businesses pay their debts before incurring levies.

  • You can set up an extension with the IRS to pay your taxes
  • Can set up payment plans
  • May be able to pay less than you actually owe (contact a trusted tax attorney for more details)

Of course, these options aren’t always immediately achievable for every business. You may owe too much money, or you may have already exhausted the options above. We heavily recommend that every business attempts an offer in compromise before (or after) they receive their Notice of Intent to Levy letter.

But what happens if you can’t do any of the above? What happens when you’ve already been hit with a tax levy? Are you doomed? Here’s how you can go about getting an IRS tax levy released.

How to Release an IRS Tax Levy

For those of you that already have an IRS tax levy against them, things can feel hopeless. Usually, you’ll get a levy on your bank account(s) or business account(s). For the IRS, dealing with pure liquidity in the form of cash is far easier than selling property, equipment, or vehicles — so bank accounts are generally the first place they start.

The quickest and easiest way to get rid of a levy is to pay the amount of owed tax in full. But, if a business gets hit with a levy, there’s a good chance they can’t afford to pay off the tax debt. Otherwise, they would have likely contacted a tax professional before the levy was put in place. This means that businesses facing tax levies are often unable to pay the full amount, and they may be facing financial hardship if they were to attempt to pay their outstanding tax debt.

Don’t worry! There are options. For starters, you need to get in immediate contact with a tax attorney and attempt to appeal the levy. Without an appeal, you’ll quickly see the levy drain your business of its financial resources — which can result in business closures and significant stress and financial hardship to you, your employees, and your loved ones.

One of the best tools for combatting an IRS levy is economic hardship. If you can prove that the levy will create immediate economic hardship for you or your business, you can have the IRS lift the levy.

What Is Economic Hardship?

The IRS considered economic hardship (or financial hardship) a situation where a taxpayer is unable to meet basic needs if they were to pay back the owed tax. The Treasury regulations and the Internal Revenue Manual state that economic hardship is a situation where a “taxpayer” is “unable to pay his or her reasonable basic living expenses.”

It’s important to note three things about economic hardship — which puts you in a Currently Not Collectible (CNC) status:

  • You still owe the IRS the money. CNC-status via economic hardship doesn’t make the problem go away; it pushes it off. In fact, you’ll continue to collect interest on the owed taxes.
  • The IRS will take all of your future tax returns and apply them to the amount owed until the amount is paid off.
  • The IRS can still file a Notice of Federal Tax Lien against your property.

The IRS uses and allowable living expense (ALE) process to determine the eligibility for financial hardship, and IRC 6330 allows taxpayers to leverage economic hardship as a “challenge to the appropriateness of collection action.” Unfortunately, the IRS doesn’t use ALE during its collection process. In other words, the IRS isn’t proactively looking for individuals who, when collected upon, would fail to meet their ALE requirements. In fact, in 2018, around 40% of individuals who set up their own installment agreements fell at or below ALE requirements — placing over 155,000 taxpayers in economic hardship.

A key thing to note here is the use of the word “taxpayer” when talking about economic hardship. In the IRS tax code, this term is semi-ambiguous. In IRC 7701(a)(1), “taxpayer” refers to both businesses and people. Yet, in IRC 6343(a)(1)(d), “taxpayer” refers only to individuals.

So, where do businesses stand?

Understanding Economic Hardship as a Business

Understanding the Role of Hardships for Businesses With an IRS Levy

Businesses can be directly impacted by IRS levies. You may see your accounts receivables, business accounts, or even subcontractor payments receive a lein.

This can lead to some serious issues for businesses. You may receive a lien that would directly impact your ability to pay your employees, pay your mortgage, and continue running your business. And when it comes to businesses, proving economic hardship isn’t easy. In 2017, a Manor Nursing Home took the IRS to tax court over the usage of economic hardship. The IRS put a levy on their accounts payable, and, according to the nursing home, this would cause them economic hardship.

The Tax Court eventually ruled in favor of the IRS. However, they also stated this:

This ruling “does not foreclose non-individual taxpayers from relief in circumstances where the proposed collection action, if sustained, could result in some form of economic difficulty.” In other words, businesses can qualify for economic hardship, though the process will require expert advice and a team of tax lawyers.

To dive a little deeper, IRS hardship rules require that you meet one of the following:

  • Make less than $84,000 annually.
  • Have little-to-no funds left after making payments.
  • Live off of unemployment
  • Live off of social security
  • Are unemployed with no sources of income

For most individuals, proving economic hardship involves figuring out your “net disposable income.” To calculate this, you take your allowable living expenses (e.g., food, utilities, mortgage payments, healthcare expenses, transportation, personal care products, clothing, etc.) and subtract them from your monthly income. If that results in a net negative, you may qualify for economic hardship CNC status.

For businesses, this gets a little more complicated. You need a tax expert. Business finances are complex, and you’ll need assistance navigating the complex world of IRS regulatory code.

Are You or Your Business Facing an IRS Levy?

At Silver Tax Group, we specialize in helping individuals and businesses solve tax issues. From IRS levies and liens to emergency tax services and tax court litigation, we can help you discover the right options for your personal or business IRS issues. Contact a Tax Professional today to learn more.

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