IRS Bank Levy on a Business Account: How to Respond

Few things feel more urgent than finding out the IRS has frozen your business account. Payroll, vendors, and rent all run through that account. The good news is that a levy comes with a defined timeline. The bad news is that the timeline is short, and what you do inside it matters.

What a bank levy is

A levy is the legal seizure of property to satisfy a tax debt. It is different from a lien, which is a claim against property. The IRS can levy bank accounts, wages, accounts receivable, and other assets. In the case of a bank levy, the IRS sends a notice of levy to your bank, and the bank holds the funds in the account at that time.

The 21-day window

According to the IRS, funds in a levied account are held, and after 21 days they are sent to the IRS. That window is your opportunity. During it you may be able to resolve the underlying debt, arrange a payment plan, prove hardship, or show that the levy was a mistake. Once the bank sends the money, recovering it is far harder.

• The levy generally captures the balance in the account when the bank receives the notice, not future deposits.
• A new deposit after the levy may be outside the original levy, but the IRS can issue another one.
• Checks and debits that were still pending may bounce, so expect operational disruption.

What notices come before a levy

The IRS generally must send notices before levying, including a bill titled 'Final Notice of Intent to Levy and Notice of Your Right to A Hearing'. The IRS tells recipients to contact it right away if they receive one. If you have been ignoring IRS mail, check your records, since the levy may be the first time you learn how far the process has gone. Earlier notices include the one described in IRS Notice CP504.

How a levy gets released

The IRS says a levy may be released if it is causing an immediate economic hardship or was issued in error. Other common grounds include resolving the debt in full, entering into an agreement the IRS accepts, or the collection period running out. A release is not automatic. You have to ask for it, usually by calling the number on the levy notice and providing information.

Steps to take right away

1. 1Get a copy of the levy notice from your bank and read the tax periods and amount it covers.
2. 2Call the IRS employee or number on the notice. Do not wait for the 21 days to pass.
3. 3Be ready to explain the hardship: payroll, rent, essential operating costs, and what the frozen money was meant to cover.
4. 4Ask what it would take to release the levy, such as a payment plan, immediate partial payment, or financial statements.
5. 5Move future deposits to a separate account only if you are acting in good faith and on advice. Hiding money from the IRS makes things worse and can create additional exposure.
6. 6Get qualified representation if the balance is large or the facts are complicated.

Is your business or you personally exposed?

A levy on a business account generally means the business itself owes the tax, such as unpaid payroll or corporate taxes. For sole proprietors and single-member LLCs reporting on a personal return, the owner owes the tax and personal and business accounts may both be reachable. Owners can also be personally exposed for unpaid trust fund payroll taxes. See payroll tax problems.

How to avoid the next levy

• Respond to every IRS notice by its deadline.
• File all required returns. Unfiled returns can block payment plans.
• Make current-period payroll deposits and estimated payments on time while you resolve the past balance.
• Set up a payment plan or other agreement before collection escalates. See IRS payment plans.
• Review all relief options in small business tax debt relief.

Our IRS resolution service can help you assess the levy and your options. To get help with your business tax situation quickly, have the levy notice and your latest IRS notices ready. Results depend on your facts and are not guaranteed.