What is an IRS levy?
An IRS levy is a legal seizure of a taxpayer's property to satisfy an outstanding tax debt. A levy may involve IRS seizure of wages, bank accounts, or physical property. It can be initiated if an individual or business fails to pay their taxes after receiving a series of notices from the IRS.
For employers, it’s important to understand how an IRS levy may affect their employees and business operations. If your business receives a levy notice for one of your employees, you may be required to withhold a portion of their wages or seize other assets until the debt is settled.
Why IRS levies matter to employers
IRS levies are serious and can cause significant disruption to both personal and business finances. Here’s how they impact employers:
- Employee payroll complications: An IRS levy order may require you to withhold a portion of an employee’s wages and remit it directly to the IRS. You could incur penalties for your business if you don’t integrate this into your payroll process.
- Legal consequences: Failing to respond to an IRS levy or withholding the required amounts can result in severe legal and financial consequences for your business.
- Employee relations: Receiving an IRS levy notice can be an embarrassing and stressful experience for employees. As an employer, maintaining discretion and respect when dealing with levy-related payroll deductions is crucial to employee morale and trust.
- Business disruption: While levies typically target individual employees, if the IRS issues a levy against your business’s bank account or assets, for unpaid business taxes, your funds may be frozen, or assets could be seized.
Types of IRS levies
Different types of IRS levies can be issued, depending on the nature of the unpaid tax debt:
- Wage garnishment levy: One of the most common types of levies that affect employees, the IRS will issue a wage garnishment to your business, which requires you to withhold a portion of the employee’s wages. The amount depends on the employee’s income and family situation.
- Bank levy: A bank levy allows the IRS to freeze a business’s bank account and withdraw the funds to cover unpaid tax debt. If the IRS issues a bank levy, it typically gives the taxpayer a window to resolve the debt before it proceeds with the seizure.
- Property levy: The IRS may seize business or personal property, such as equipment, vehicles, or real estate, to settle outstanding tax debts. In extreme cases, the IRS can sell the seized property to recover the money owed.
Tax refund levy: If the taxpayer is due a tax refund, the IRS may seize the refund to offset the owed tax debt.With all the different kinds of IRS levies, it can be tricky to manage your legal obligations with manual payroll. That’s where small business payroll software can help, by automating withholding amounts and tracking employee levies in one place.
The IRS levy process
The IRS does not issue levies without warning. The process typically follows these steps:
- Notice of Assessment: The IRS first issues a notice of assessment if taxes are due and unpaid.
- Notice and Demand for Payment: The IRS will send this notice, allowing the taxpayer to pay or settle the debt.
- Final Notice of Intent to Levy: If no payment is made, the IRS sends a "Final Notice of Intent to Levy," which alerts the taxpayer that a levy will be imposed. This notice gives the taxpayer 30 days to respond before the levy is enacted.
- Levy Issuance: After 30 days, the IRS can issue the levy. The levy can apply to wages, bank accounts, property, or other assets.
If the taxpayer is unable to resolve the debt, the IRS may proceed with further action, including the sale of assets or the garnishing of wages.
Mistakes to avoid with an IRS Levy
Understanding these common pitfalls can help employers navigate levy situations more effectively and avoid unnecessary complications.
- Ignoring levy notices: Failing to respond to IRS levy notices can result in significant consequences. Always respond promptly to any IRS communication and seek legal counsel if you are unsure about how to proceed.
- Not complying with the levy order: As an employer, you are legally obligated to comply with IRS levy orders. Failure to comply can result in additional penalties, including liability for the debt owed by the employee.
- Discussing employee levies openly: While it may be necessary to withhold a portion of an employee's wages, it is essential to maintain confidentiality. Discussing an employee's levy with other staff members can violate privacy and damage relationships.
- Not seeking professional advice: If your business is faced with an IRS levy, especially if it involves business taxes, it’s important to seek advice from a tax professional or attorney to ensure you understand your rights and obligations.
How Homebase helps with IRS levies
Homebase simplifies the payroll process and helps you manage IRS levies with ease. When an IRS levy is issued, Homebase can automatically adjust payroll to ensure compliance with withholding requirements.
With Homebase, you can:
- Track and manage employee levies in one place
- Automatically withhold the correct portion of wages for levy payments
- Generate reports to keep track of levied amounts and ensure proper remittance
- Stay compliant with federal and state tax regulations
Sign up for Homebase today to ensure that you are always in compliance with IRS regulations, and avoid the stress of manual adjustments using Homebase to automate your payroll processes and handle IRS levies with ease.