Owners often ask whether the IRS can 'garnish' their business. The legal mechanism is a levy. A levy is a seizure of property to pay a tax debt, and the IRS has broad power to use it once the required notices have been sent. This article explains where business income is exposed, and what you can do about it.
Garnishment vs levy
In everyday language, garnishment means taking part of someone's paycheck or money held by a third party. In IRS terms, the equivalent is a levy. The IRS can levy wages, bank accounts, accounts receivable, and other property. A creditor's garnishment normally needs a court judgment. The IRS levy process is administrative, but it comes with notice requirements and appeal rights.
Where business income is exposed
- Business bank accounts, through a bank levy. The bank holds the money, and after 21 days it goes to the IRS.
- Accounts receivable, by serving a notice of levy on your customers so that they pay the IRS instead of you.
- Wages you receive from your own S corporation or C corporation as an owner-employee, through a continuous wage levy.
- Payments from payment processors and platforms, which can be levied like other third-party payers.
- Other business assets, such as equipment or inventory, in more serious cases.
Which entity owes the debt matters
A levy reaches the property of the person or entity that owes the tax. A corporation or partnership that owes payroll or income tax can have its own accounts and receivables levied. A sole proprietor or single-member LLC reporting on a personal return owes the tax personally, so business and personal assets can both be reached. An owner of an S corporation or LLC with corporate treatment is generally not personally liable for the entity's income tax, but can be liable for trust fund payroll taxes if they were a responsible person.
Customer levies and what you must do
If you receive an IRS notice of levy because one of your customers owes the IRS, the IRS says it is important to comply with it. Failing to comply can expose you to liability. On the other side, if the IRS sends a notice to your customers, your cash flow takes an immediate hit. Contact the IRS promptly to discuss releasing the levy once you have a resolution in place.
Wages: continuous, with an exempt portion
According to the IRS, wage levies are continuous, meaning they stay in place until released, and a portion of wages is exempt from levy. The exempt amount depends on filing status and the number of dependents, and the IRS publishes the figures. If you pay yourself a salary through an S corporation, expect that income to be reachable if you personally owe a tax debt.
How to stop or prevent a levy
- 1Respond to notices. The Final Notice of Intent to Levy and Notice of Your Right to A Hearing carries appeal rights, and the IRS tells you to contact it right away.
- 2File any missing returns so you are eligible for a resolution.
- 3Arrange a payment plan or other agreement. See IRS payment plans for small business owners.
- 4Request a release if the levy is causing an immediate economic hardship or was issued in error.
- 5Consider other relief if you cannot pay. See small business tax debt relief.
State levies are separate
State tax agencies have their own collection powers, and the rules differ by state. Some states can levy bank accounts and wages administratively, others require additional steps. A state tax balance is not covered by an IRS payment plan, so address each agency separately. If your issue is with a specific state, check that state's department of revenue for its notice and appeal procedures.
If a levy or levy notice has arrived, see IRS bank levy on a business account. Our IRS resolution service can walk through your notices, or you can get help with your business tax situation. Results depend on your facts.
