What is a federal tax levy?
A federal tax levy is a legal action taken by the U.S. government to seize a taxpayer’s property or income to satisfy unpaid federal tax debts. The Internal Revenue Service (IRS) has the authority to initiate a levy after a taxpayer has failed to pay their taxes, ignored repeated notices, and after a final demand for payment has been made.
A levy differs from a lien, which is a legal claim on property due to unpaid taxes, but does not result in the seizure of assets. A tax levy can involve garnishing wages, freezing bank accounts, or seizing personal property to cover the unpaid tax amount.
For small business owners, especially those who run payroll for their employees, it’s important to understand the consequences of a federal tax levy—not only because it can affect your assets but also because it can impact your business operations, including payroll, bank accounts, and other financial matters.
Why federal tax levies matter for employers
Federal tax levies are serious business. If the IRS levies your assets, it means they’ve exhausted other collection methods and are using direct action to recover the debt. If you own a business, the consequences can be severe:
- Wage garnishment: The IRS can garnish an employee's wages directly from their paycheck if a federal tax levy has been issued, which can impact employee morale and trust. For business owners, it can also create payroll disruptions.
- Seizure of business assets: If taxes remain unpaid, the IRS may levy business assets, including bank accounts, vehicles, and equipment. This can disrupt your business operations and even jeopardize your ability to run day-to-day activities like making payments to vendors or paying employees.
- Liability for unremitted payroll taxes: The IRS may levy a business owner's assets if the business has failed to remit the taxes withheld from employees’ paychecks. As a responsible employer, you are required to hold these funds in trust and remit them to the IRS, and failure to do so can result in severe penalties, including personal liability.
- Business disruption: A federal tax levy can disrupt your cash flow, freeze your assets, and result in extensive delays in business operations. If your business bank account is frozen or other financial resources are seized, you might struggle to cover regular operating expenses.
Legal and compliance considerations with tax levies
As an employer, it’s essential to understand how tax levies work and the legal obligations you have to avoid them. Here are a few compliance points you should be aware of:
- Trust Fund Recovery Penalty (TFRP): If you fail to pay the taxes withheld from employees (such as federal income tax and FICA taxes), the IRS may assess the Trust Fund Recovery Penalty. This penalty holds business owners personally responsible for unremitted payroll taxes. The IRS can issue a federal tax levy against business owners’ assets if it believes the tax liability was willfully avoided.
- Collection Due Process (CDP) Hearings: If you receive a federal tax levy notice, you may request a Collection Due Process hearing to contest the levy. This process provides you with the opportunity to present your case and potentially resolve the tax debt without further collection action.
- Exemptions for levy: While the IRS can levy most types of income and property, there are some exemptions. For example, certain types of government benefits, such as Social Security payments, are protected from levies. However, businesses should always verify these exemptions with a tax professional.
- IRS Enforcement Actions: If your business is hit with a tax levy, the IRS may also enforce other collection actions, such as placing liens on your property or applying additional penalties for non-compliance. These actions can negatively impact your business credit and reputation.
Common mistakes to avoid with a federal tax levy
Understanding these common pitfalls can help you avoid costly errors and keep your business in good standing with the IRS. Here’s what to avoid:
- Failing to remit payroll taxes on time: One of the most common mistakes leading to a federal tax levy is failing to withhold and remit payroll taxes (such as Social Security, Medicare, and federal income tax) on time. Payroll taxes must be deposited regularly according to the IRS schedule.
- Ignoring IRS notices: If you receive any notices from the IRS regarding overdue taxes, don’t ignore them. Failure to respond to IRS communication can lead to additional penalties, interest, and potentially a tax levy.
- Not keeping accurate records: If your business doesn’t maintain accurate payroll and tax records, it can be difficult to prove that you’ve been compliant with tax requirements. Poor documentation makes it harder to dispute tax levies or negotiate a payment plan.
- Underestimating the IRS’ability to enforce collections: Many small business owners believe that the IRS won't take action on a small amount of unpaid taxes. However, the IRS is aggressive in collecting payroll taxes, and they have the authority to enforce levies on both personal and business assets.
- Not seeking professional help: Tax law can be complex, and mistakes are easy to make. Small business owners should consult with a tax professional or accountant to ensure they are fully compliant with all payroll tax requirements and to handle any tax disputes before they escalate.
Using small business payroll software can also help minimize mistakes and oversights that might cause your business to fall into tax debt.
How Homebase helps prevent federal tax levies
Homebase can help you avoid the risk of a federal tax levy by ensuring that payroll taxes are calculated and paid accurately and on time. With our automated payroll system, you can:
- Calculate payroll taxes accurately for every employee based on their withholdings
- Remit payroll taxes directly to federal and state authorities, reducing the risk of late payments
- Track payroll deductions to ensure full compliance with tax regulations
- Maintain audit-ready records to help you resolve disputes quickly
With Homebase, you can rest assured that your payroll taxes will be handled properly, reducing the likelihood of a federal tax levy and keeping your business in good standing with the IRS.
Sign up for Homebase today to automate tax withholding, stay compliant, and protect your business from the risks of a federal tax levy.