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How Unpaid Business Taxes Can Lead to IRS Liens and Levies

Dealing with taxes as a business owner can be overwhelming. Between filing returns, making payments, and staying compliant, it’s easy to fall behind or make mistakes. But failing to pay business taxes in a timely manner can lead to serious consequences with the IRS, including tax liens and levies. Understanding how this happens is key to avoiding these outcomes.

Overview of Business Taxes

The main federal taxes a business must pay include:

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  • Income tax – Based on a business’s net taxable income. This includes pass-through entity taxes for partnerships, S-corps and sole proprietorships.
  • Employment taxes – These include Social Security, Medicare taxes, and federal unemployment taxes that must be withheld from employee wages and matched by the employer.
  • Excise taxes – Applied to specific goods, like fuel, alcohol, and tobacco.

There may also be state and local taxes to comply with as well.

If a business struggles to pay these taxes on time, penalties and interest start accruing right away. The IRS may also file tax liens and attempt to levy business assets.

What Triggers IRS Collection Actions?

The IRS does not immediately deploy aggressive collection tactics against businesses that miss tax payments. According to IRS rules, they generally start with balance due notices and phone calls.

However, if a business continues to ignore its tax debt, the IRS can take more punitive collection actions such as:

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  • Tax Liens – After sending a few delinquency notices, the IRS can file a public notice tax lien on a business’s property. This gives them security interest in case the tax debt isn’t resolved.
  • Levies – If a tax lien does not motivate payment, the IRS can seize and sell assets like bank accounts, accounts receivables, vehicles and equipment to satisfy the tax debt.

According to experts, the IRS usually resorts to liens and levies if a business owes $10,000+ or has missed tax payments several quarters/years in a row.

The Lien Process Step-By-Step

Here is how the IRS tax lien process typically unfolds:

  1. Notice of Federal Tax Lien – The IRS files a public Notice of Federal Tax Lien (NFTL) stating the taxpayer owes back taxes. This attaches the government’s rights above most other creditors.
  2. Notice of Lien – The IRS issues Letter 3172 notifying the taxpayer a lien has been filed in a specific location like county records. This is mailed within 5 days of filing the NFTL.
  3. Collection Due Process Hearing – The taxpayer has 30 days from receiving Letter 3172 to request a hearing to appeal or resolve the lien. This is the time to work out a payment plan or settlement.
  4. Notice of Determination – After the hearing, the IRS issues a determination approving or rejecting the lien filing. At this point levies may begin if the lien stands.

According to FindLaw, resolving IRS liens quickly is critical, because the government can seize assets once 30 days passes after issuing a Notice of Determination.

The IRS Levy Process

If liens do not result in tax payments, the IRS may proceed to accessing business assets via levies. The levy process includes:

  • Notice of Intent to Levy – The IRS issues Letter 1058 warning a taxpayer they plan to seize assets within 30 days if the tax bill remains unpaid.
  • Final Notice of Intent to Levy – If taxes remain unpaid after the first notice, the IRS sends Letter LT11 advising levy action is imminent. At this point bank accounts and receivables are at risk.
  • Levy Order – After proper notice, the IRS can issue a levy order to seize assets like bank accounts, accounts receivable, vehicles and equipment. The assets are liquidated to pay off the tax debt.

According to Reddit users, the IRS may also contact third-parties associated with the business to investigate asset ownership in preparation for levies.

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So to avoid relinquishing assets to the IRS, it’s imperative to address back taxes and make payment arrangements quickly after receiving notifications of liens and potential levies.

Options for Resolving Business Tax Debt

If you receive an IRS notice about unpaid taxes, liens or levies, don’t panic. There are options for resolving tax debt and avoiding further collection actions:

Payment Plans

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The IRS offers payment plans that allow you to pay off tax debt over 6-72 months. Options include:

  • Short-term payment plan – Pay off balance in 120 days or less
  • Installment agreement – Pay off amount over 6-72 months
  • Partial pay installment agreement – Pay part of what you owe as a good faith effort

Offer in Compromise

With an offer in compromise, you can settle tax debts for less than the full amount owed based on inability to pay. This is an option if you lack income/assets to pay in full.

Penalty Abatement

You may qualify for a penalty waiver if failure to file/pay was due to reasonable cause and not willful neglect. This reduces penalties owed.

CNC Status – Currently Not Collectible

If you truly cannot pay anything based on financial hardship, the IRS may temporarily halt collection until your situation improves.

Action Timeline Notes
Payment Plan 6-72 months Must stick to agreed payment schedule
Offer in Compromise Varies Generally pay 20-25% of tax owed
Penalty Abatement N/A Penalties waived if meet reasonable cause criteria
CNC Status 1 year review cycles IRS will review financials annually

Table summarizing options for resolving IRS tax debt

The key is acting quickly to avoid tax liens and levies. Consulting a tax attorney or resolution firm can also help negotiate the most favorable outcome.

Using Legal Help to Resolve Business Tax Issues

Navigating IRS tax debt resolution is extremely complex. Using legal counsel significantly improves your chances of avoiding tax liens and levies.

According to tax experts on Avvo, lawyers have the expertise to:

  • Carefully review your case – Determine the best strategies and resolution options based on your situation.
  • Stop aggressive collections – Ask for Collections Due Process hearings to pause IRS collection efforts during negotiations.
  • Communicate with the IRS – Tax attorneys convey credibility and can quickly get responses from the IRS.
  • Negotiate settlements – Present detailed financial analysis to negotiate offers in compromise or Currently Not Collectible status.
  • Argue reasonable cause – Effectively argue for penalty abatement by demonstrating reasonable cause criteria.
  • Litigate when needed – Take cases to tax court if the IRS makes unfavorable determinations.

Lawyers also protect client rights and ensure proper procedures are followed by the IRS.

When facing tax liens and levies, the worst thing you can do is nothing. With help from a tax attorney, you can take control of your situation and reach the best possible outcome. Don’t wait to seek legal assistance.

Recap: How Tax Debt Leads to IRS Collection Actions

To summarize, here is an overview of how unpaid taxes trigger IRS liens and levies:

  • Businesses accumulate substantial tax debt across income, payroll and excise taxes
  • After issuing delinquency notices, the IRS files a Notice of Federal Tax Lien
  • Taxpayers have 30 days to challenge the lien filing via a CDP hearing
  • If the lien stands and taxes remain unpaid, levy warnings follow
  • Finally bank accounts, receivables and assets face seizure via IRS levy orders
  • Consulting a tax attorney for representation is highly recommended

Falling behind on taxes puts your business assets and livelihood at risk. If you have outstanding tax obligations, now is the time to understand your resolution options. With professional guidance, you can avoid further collection actions through payment plans, settlements or penalty relief. Don’t wait until you face dire IRS consequences – take control of your tax situation today.

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