US currency notes and tablet computer. Filling online tax information. concept: Tax Levy
Betsy Wise
By: betsy_wise
Read in 8 minutes

What Is a Tax Levy?

The other day, as I was planning this article, I heard a joke that made me think of tax levies:

A young woman ran into the street, screaming for help because her son swallowed a coin and was choking. A passerby hit the boy on the back, and out came the money. Relieved, the mother said, “Thanks Doc.” He replied, “I’m not a doctor. I work for the IRS to collect unpaid debts.”

A tax levy works a lot like coughing up swallowed coins. If you owe the Internal Revenue Service for back taxes, they will take your assets and basically do everything in their power to collect funds owed to them.

In this post, not only will you learn what a tax levy is but how it negatively affects your business, how to remove a tax levy, and tips on how to avoid getting one. 

What is a tax levy?

A tax levy is the government’s official declaration that they’re on their way to seize your property. Before this action, the IRS issues a tax lien notifying you they have first rights over creditors to real estate and personal property as well as other financial assets. 

So you know, tax authorities have the legal power to seize assets without taking you to court.  

Couple managing the debt ***These documents are our own generic designs. They do not infringe on any copyrighted designs. Concept: tax levy

Tax levy vs. tax lien: the difference

The government uses a tax lien to make claims on your assets; whereas, a tax levy authorizes them to take possession of your property. 

Once you receive a Notice of Federal Tax Lien, the government contacts your creditors notifying them of its legal right to your property. Then, if you fail to pay your obligations to the IRS, they take and sell your real and personal property and any other assets you have an interest in. 

Even if that happens, you can legally file a claim to have the levy proceeds collected by the IRS returned to you. Should you still refuse to pay the tax debt, the IRS can reissue a tax levy.

How can a tax levy affect my business?

If a tax levy seems like your business’s worst nightmare, it’s because it is. Not only do you run the risk of ruining your personal and business credit depending on your business structure, but the IRS could also freeze your bank accounts. 

An ongoing tax lien makes it harder to get a business loan since the government has a claim to your property before lenders. You’ll likewise have a harder time refinancing an existing loan or selling your business.

Furthermore, when there is a tax levy in place, the IRS withholds Federal tax refunds, and state and municipal authorities send returns to the IRS instead of you.

The IRS can seize your vehicles, real estate, equipment, and inventory and then sell them. Moreover, patents, trademarks, and copyrights are also up for grabs. As a last resort, they may take your home to use sale proceeds to satisfy the amount of the tax lien. 

Then too, suppliers, creditors, and customers will no longer view your small business as creditworthy. Overall, the financial impact on your business is similar to declaring bankruptcy.  

A tax levy can put you out of business.

That’s why it’s essential to do everything in your power to never get a tax lien and, consequently, a tax levy.

tax levy. Designed by Photoroyalty / Freepik

How do I get a tax levy released?

It’s possible to stop a tax levy in progress by taking any of these steps.

  • Pay your tax obligation in full

Your number one goal is to cooperate with tax officials and/or a collection agency by paying immediately what you owe. Once you do so, the IRS generally removes a tax lien from your record within 30 days. 

  • Set up a formal installment plan

Keep the communication lines open and establish a friendly relationship with the IRS when your financial situation prevents you from paying the full amount of the tax owed. 

The IRS will work with you to pay your tax obligation over some time. Taking proactive steps alerts the IRS that you’re serious about resolving the debt. 

Keep in mind, the IRS continues to charge penalties and interest and a setup fee to initialize installment plans.

  • Provide proof you are unable to pay

By providing data relating to your income, expenses, and assets, it may be possible to reduce the amount of the total tax you owe. Not only that, you delay the government starting collection proceedings. 

In the meantime, you can send in payments (no matter how small) to reduce the amount you owe.

  • Appeal the tax lien

Mistakes do happen. 

You may need to file an amended return if you made an error or dispute the findings if you disagree with the IRS on what they say you owe them. In some cases, business owners can ask the IRS to release a tax levy when they prove that the levy keeps them from meeting basic living expenses.

Businessman works with W-4 tax form and calculator. concept: tax levy

How do I avoid a tax levy?

The IRS sends several letters before they take more drastic steps through a tax lien and a tax levy. They give a business owner ample opportunities to rectify the problem. 

Obviously, your priority is always to pay your taxes on time and pay the amount in full. But things are not always that easy, right? But there are always other things you can do to avoid a tax levy.

  • If you find that you can’t submit your tax return on time, you can file for an extension. 
  • Should you not be able to pay what you owe in full, contact the IRS and let them know. 
  • If the IRS sends a letter saying you owe an amount that isn’t correct, contact an accountant. Tax professionals know how to handle these types of discrepancies and can act as a mediator on your behalf so that a tax lien is never issued.

Keep what’s legally yours

As you can see, a tax levy isn’t something you ever want to encounter because you need assets to run your business. If you stay on top of your financial tax obligations, it’s unlikely you’ll ever face this unpleasant experience. 

At Camino Financial, we do everything possible to help you succeed and are passionate about our motto, “No Business Left Behind.”. Along with educational articles like this one, we also offer microloans and small business loans, so you have funds to grow your business. Like you, we want you to succeed at every stage of business growth.

We invite you to keep reading:

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