A bank account levy can be described as a situation where the IRS seizes the funds in a particular bank account to cover the tax debt of the owner of the account. It should be noted that the IRS can legally seize a single-member limited liability company (LLC) property to satisfy taxes if the owner has not filed IRS Form 8832 and have failed to respond to the IRS notice of overdue tax debt.
The IRS actually takes property and uses its value to satisfy the amount of the debt that has accrued. Before this is done however, IRS will make contact with the bank in which the funds were lodged and request the bank to freeze the LLC account. The bank freezes the money, and sends the money to the IRS on the 21st day of the freeze.
As an LLC account owner, your main aim will be to avoid a bank account levy or prevent the funds from being taken once the bank has frozen the account. It’s important to note that once the IRS has been given access to the funds in the account, it is difficult to get it back.
It should be noted that you can stop a bank account levy after your bank has frozen the funds in preparation to be sent out to the IRS. However, you only have 21 days, and if you miss that window, your bank will send your money to the IRS.
Usually, you cannot get the money back once the IRS takes it, but of course there are exceptions to this rule. The money confiscated is used to pay off the taxes you owe. If you want to make arrangements, you need to do that before the funds are gone. You have 30 days after receiving the Final Notice of Intent and an additional 21 days after the bank has frozen your account.
Table of Content
- How to Know your LLC Account is About to Be Levied
- Can the IRS levy your Corporation or LLC for your Individual Taxes?
- 1. Get a professional
- 2. Comply with the IRS
- 3. Ask the right questions
- 4. Endeavor to secure a ‘release of levy’
- 5. Fight to get the ‘release of levy’ to the bank before it’s too late
- Your Best Argument to Get a Release of Levy
How to Know your LLC Account is About to Be Levied
The IRS has tremendous power when it comes to seizing assets such as funds in your bank account. However, before the agency can take your money, the following three things must usually happen (with exceptions):
- The IRS must assess a tax liability and send you a notice.
- You must fail to pay or fail to make other arrangements.
- The IRS must send a final notice of intent to levy. The letter must explain that you have 30 days to appeal or make payment arrangements.
If the IRS skips any of these steps, you can get the levy reversed based on procedural errors. However, the IRS only needs to send you a notice of your rights once for each tax period.
Can the IRS levy your Corporation or LLC for your Individual Taxes?
It should be noted that the IRS cannot levy your Corporation or LLC for your individual taxes. With your social security number, you are an entity separate from your corporation or LLC which has its own federal identification number and is a separate entity.
A limited liability company is a legally separate entity created under state statutes. Therefore, it is wholly distinct from its owners. An LLC shields its owners from personal liability related to the operations of the business. If an LLC fails to pay the IRS or its creditors, they may garnish its bank account. If the LLC’s owner fails to pay personal debts, neither the IRS nor creditors can garnish its bank account, as long as the LLC maintains its separate status.
Some Revenue Officers, particularly in Las Vegas, will break the law and levy corporate bank accounts or accounts receivable for the owner’s personal taxes. The banks usually will not pay such levies; accounts receivables out of fear of the IRS sometimes will pay such levies. Small business owner’s have no problem suing the bank if they pay such a levy.
How to Recover Your Money From an IRS Levy on Business Bank Account
It can be quite traumatic for a business owner to learn that the Internal Revenue Service has taken all the money out of their business bank account. The hardest part is not knowing how or why it happened, nor what to expect going forward. One bank levy and all of the sudden it feels like you have just lost your business and will never recover. Emotions run high at that moment, understandably. However, there is something you can do.
1. Get a professional
First off, if you are in this position with the IRS then you really should consider hiring a professional to help you resolve your tax balance. With their measured approach, as opposed to the highly emotional state of the business owner in this situation, they can work to both fight the levy and try to resolve the complete case so levies do not happen in the future.
The IRS cannot simply take money out of the bank account of just any business, any time, for any reason or no reason at all. That would violate due process. To be subject to bank levies, a business must owe the IRS money, the IRS must have issued all the prior due process notices, and the business must not have a formal resolution in place for that balance.
2. Comply with the IRS
If you owe the IRS money for back taxes, there are a few things you need to ask yourself. How much do you owe? Is it an amount you could pay off in full right now? If so, get it paid and put the problem behind you. If not, though, you need to find a way to resolve the debt.
To get formal resolution of some kind, you must first be in compliance with the IRS. Compliance means that you have all of your tax returns filed and you have made your most recent federal payroll tax deposits on time and in full. Payroll tax deposits are the most likely problem. It is quite common for the IRS to levy a business when they have not been making their federal tax deposits.
3. Ask the right questions
If you owe the IRS and you are yet to resolve the matter. If the IRS has levied your bank account, you need to know what to do next. First of all, you need to determine:
- When did the bank actually process the levy?
- How much was in your account at the time the levy hit?
- How much was taken from your account?
- How much was the levy for?
4. Endeavor to secure a ‘release of levy’
It is important to understand that an IRS bank levy is essentially a 21-day freeze. That twenty-one days starts the day the money actually becomes frozen. If you manage to get a levy release from the IRS, it must be sent to your bank before that 21 days is up.
What happens at the bank is that the day they receive the levy in the mail, they process it and take all the money out of your account, up to the amount on the Notice of Levy. The bank then sets that money aside (not yet sending it to the IRS) and holds on to it for 21 days.
The bank will then wait to see if they receive a Release of Levy from the IRS within that 21 days. If they do, they will put the money back into your account. If not, then after that 21 days has passed they mail a check to the IRS for the amount that came out of your account.
5. Fight to get the ‘release of levy’ to the bank before it’s too late
Once you understand the amount that was taken out of your account and the amount of time you have to recover it, you will want the necessary bank information to assist in expediting a Release of Levy, should you manage to obtain one.
Normally, when a Release of Levy is issued it gets mailed. If the bank does not receive and process it within the 21 days, then it will be too late and the check will already have been mailed to the IRS. If you can help get that Release of Levy to the bank more quickly, then you should.
To potentially expedite a Release of Levy, should you get one, you will want to call your bank and ask them who the person or department is at your bank that handles “tax levy releases” and what their fax number is. Their phone number is not helpful here. You are getting the fax number so you can give it to the IRS to fax the Release of Levy directly to the proper person or department to process it right away.
Your Best Argument to Get a Release of Levy
The IRS does not simply issue a Release of Levy just because you asked for it. They have their hands on your money, and are intent to keep those funds. The only thing you can do is to find a way to get your balance paid down. You must make a very persuasive argument to get that money released. Based on research, it has been found out that the most successful arguments are:
- You cannot pay your employees the payroll that is now due;
- The compliance problem that caused the IRS to levy has been resolved;
- You will use the funds to get into compliance with current tax deposits; or
- You will rectify whatever deadline the IRS set that you missed.
By far, the strongest argument you can make is that of the “payroll hardship.” While the IRS is aiming to collect their money, they generally do not wish to see innocent employees harmed in the process. If the business bank account is levied and employees are due to be paid in the next few days, you should aim to make this argument first.
What you will want to collect in order to support your “payroll hardship” argument is:
- The name and fax number of the person or department at the bank that handles tax levy releases ;
- A copy of a bank statement showing how much came out of your account; and
- A copy of the upcoming payroll summary showing how much your employees are due to be paid.
Providing this documented information will help the IRS to see that your employees are not going to get paid due to the levy.
Aside from the “payroll hardship” argument, if the IRS levied you because they say you did not file a particular return or did not make a federal tax deposit, you can provide them proof that the return was filed or the deposit was made. Rectifying the basis of the levy may cause them to release your fund.
You can avoid a bank account levy by keeping in good standing with the IRS. You need to file all accrued tax returns. Furthermore, if you cannot pay in full, you should at least have an agreement with the IRS. Even if you cannot pay taxes owed, it is essential to work out an arrangement with the IRS to prevent enforced collection action (wage garnishment, levies, and liens).