Can the IRS Shut Down Your Business for Unpaid Taxes?

If you do not pay your business taxes, the IRS can seize virtually everything your business owns and effectively shut down your business.

The IRS generally cannot rescind your business license or dissolve your LLC as the state can, but if you have unpaid taxes, the IRS can take your business bank accounts, inventory, and all other assets. To protect yourself, you need to be proactive about filing returns, making payment arrangements, and reaching out to the IRS if you need more time to pay. 

Table of Contents

• Why Does the IRS Seize Business Assets?
• Which Assets Can the IRS Seize From Your Business?
• Levies on Business Income and Payments Due to Your Business
• How to Appeal a Levy on Business Assets
• Personal Liability for Business Taxes
• Can the State Shutdown Your Business for Unpaid Taxes?
• How to Protect Your Business From Forced Closure

To get help now, use TaxCure to find a local tax pro who has experience dealing with tax levies and representing businesses in front of the IRS. In the meantime, keep reading for a breakdown of what the IRS can do if your business doesn't pay taxes.

When Does the IRS Seize Business Assets?

If you're a few months behind or owe a few thousand dollars, you typically don't have to worry about the IRS shutting down your business. However, the IRS may effectively shut down a business by taking its assets in the following situations:

Although the IRS has a legal right to seize assets, the agency typically only resorts to asset seizure as a last resort. Seizing assets is time-consuming and expensive, and overly aggressive collection actions tend to reflect negatively on the IRS. Whenever possible, the agency prefers to negotiate resolutions with taxpayers. 

The IRS also realizes that it can be challenging to run a business, and the agency tries to stay away from actions that cause undue economic hardship.

Will the IRS padlock your business?

The IRS will only change the locks on your business if they are seizing the property or seizing your leasehold to the property. In the second case, the IRS may need to pay rent to the landlord. 

In contrast, most states will padlock a business to prevent it from operating if the business has severely delinquent state taxes. 

Which Business Assets Can the IRS Levy?

U.S. Code § 6331 gives the IRS the right to levy assets for unpaid taxes, and the agency can seize nearly any asset your business owns. According to § 301.6334-1, only a few personal assets are exempt from IRS seizure, including "books and tools of a trade, business or profession of an individual taxpayer" worth up to $3125 in value. Unfortunately, that exemption provides very little if any relief to businesses with unpaid taxes.

The IRS may seize your business bank accounts, equipment, inventory, cash, property, leaseholds, and basically any other assets deemed valuable by the agency. 

The IRS employs very specific tactics to ensure that it gets the most value possible from seized property. For example, if the IRS is going to seize a leasehold interest, it generally tries to do so early in the month so that it can benefit from the rent that has already been paid. If the IRS seizes a large piece of property such as a semi-truck or manufacturing equipment, it will estimate the cost differences between moving the property and storing it onsite.

How does the IRS find business assets?

The IRS has all kinds of ways to find out about your business assets. The agency may do a public records search to find real estate or personal property owned by the business. The IRS may issue a summons to your bank to learn about deposited items to obtain information on accounts receivables, or if you use a billing service, the IRS may send them a summons to find out who owes you money.

What does the IRS do with large business assets?

When seizing large assets such as machinery or significant amounts of inventory that cannot be easily moved, the IRS will typically try to make arrangements to store the items on-site. However, revenue officers cannot just replace locks to store seized items on site. They must make arrangements with the property owner.

Can the IRS seize intangible business assets?

Yes, the agency can seize intangible assets, but it must specifically issue a levy on those assets. For example, say that the IRS seizes a business's inventory, supplies, and its leasehold interest. Locking the doors and seizing those assets does not also give the IRS the right to the business's accounts receivables or its bank account. Instead, the agency will need to take additional steps to levy those particular assets.

Seizing Income and Payments Due to Your Business

When an individual owes taxes, the IRS may garnish their wages. Because that's not possible with a business, the IRS may intercept payments due to your business from other entities. 

Here are some examples:

• Farm Service Agency program payments - If you receive payments from a Farm Service Agency (FSA) program, the IRS may tell the USDA to send these payments directly to the IRS for your unpaid taxes. This may include payments from conservation, commodity, and/or disaster assistance programs. 
• Merchant Accounts - If your business processes credit cards, the IRS may send a continuous levy to the merchant services account, directing them to send all payments to the IRS. 
• Daycare Payments - The IRS has the right to levy payments from parents or other responsible parties if your child or adult daycare has unpaid business taxes.
• Medicare Administrative Contractors - The IRS may levy Medicare payments that are due to your healthcare facility. These are one-time levies, but the agency may initiate a new levy every 14 days to ensure they capture as many pending payments as possible.
• Accounts Receivables - Any bills due to your business by clients, customers, patients, other companies, tenants, insurance companies, etc, can be seized through an accounts receivables levy. The IRS may contact the person or entity who owes you money and direct them to send the payment directly to the IRS, or the IRS may seize and sell the receivables. For example, there are factoring companies that buy accounts receivables for a percentage of their value.
• Notes Receivables - If anyone owes money to your business, the IRS may seize the note and intercept the payments.

By throttling your ability to earn income, the IRS effectively shuts down your business. To avoid this, you need to contact the agency by the deadline in the intent-to-levy notice. 

Will the IRS shut down essential businesses?

The IRS does not have any provisions that prevent it from shutting down essential businesses. However, when it comes to long-term care facilities, the IRS will often contact the state before intercepting payments from residents, Medicare, or insurance companies. In this situation, the IRS will try to make sure that residents have alternative care facilities in the area before taking steps that will force a long-term care facility to close.

Required Notification Prior to Business Asset Seizure

The IRS must notify your business and demand payment before seizing its assets. The agency should notify taxpayers about their tax liability due within 60 days of the assessment. However, if the agency notifies you more than 60 days after the assessment, that still meets the requirement for a notice. The IRS doesn't need to personally deliver the notice and demand for payment. Rather, they just need to mail the notice to your last known address or leave it at your dwelling or usual place of business. 

Then, the agency must send you a 30-day notice of intent to levy, such as a CP297. This notice can be given to you in person, left at your dwelling or usual place of business, or sent by certified or registered mail to your last known address. It must give you a 30-day deadline and notify you of your right to a hearing. The IRS only needs to send a single notice, even if it plans to levy multiple assets.

If you don't pay in full, request a hearing, or make satisfactory payment arrangements with the IRS, the agency can move forward with the asset seizure after the 30-day period. The agency may levy your assets sooner if there is a jeopardy determination or a disqualified employment tax levy. You may also waive your right to this 30-day period and let the IRS take the assets sooner — For example, if you think another creditor is going to seize the assets, you may want to let the IRS step in sooner.

What is a disqualified employment tax levy?

A disqualified employment tax levy is when you owe employment tax, and you have requested a CDP hearing on employment tax in the last two years. In this case, the IRS doesn't have to give you a 30-day warning, but the agency must send you a very similar letter in a reasonable time frame after the levy.

Appealing the Levy

You have 30 days to request a Collection Due Process (CDP) hearing. The hearing will be heard by Appeals with an IRS employee who has no prior involvement in your case. During the hearing, you will get to propose alternatives to the levy, such as monthly payments. If you miss the deadline to request a CDP hearing, you can request an administrative hearing with Appeals, which is referred to as an Equivalent Hearing. 

If you do not agree with the results of the CDP hearing, you can request a judicial review. Unfortunately, you do not have that right with an Equivalent Hearing. The IRS generally cannot move forward with the levy during the hearing or review process, unless the courts have granted a motion for the IRS to do so.

You also have the right to appeal a levy that has or will be taken under the Collection Appeals Program (CAP). Note that you cannot request judicial review on CAP decisions. After the IRS seizes your assets, you have 10 business days to appeal.

Sale of Seized Business Assets

The revenue officer who seized the property will not sell it unless they're dealing with perishable goods. Instead, the Property Appraisal and Liquidation Specialists (PALS) will handle the sale, but the revenue officer will communicate with them as needed. For example, if you pay in full, the revenue officer will let PALS know not to proceed.

The IRS must provide a notice of sale outlining the property to be sold and the time, place, and details of the sale in a newspaper published or circulated in the area of the seizure. The government must also notify all interest parties, such as lien holders or judgment creditors, about the sale by mail. 

The sale must be held within 10 days but not more than 40 days from the date of public notice. The government can adjourn the sale for 30 days but not postpone it. The taxpayer may request that the property be sold within 60 days, and if the IRS doesn't sell the property or establish that doing so is not in the best interest of the United States within that time frame, the taxpayer can get a credit for the value of the property as of the date it should have been sold.

PALS will establish a minimum bid price which is usually about 80% or more of the property's forced sale value, but it cannot exceed the value of the tax lien. The taxpayer has 10 days to contest the value and if doing so, can present appraisals, comps, or other details to establish a higher value. 

The sale may be a public auction or public sale under sealed bigs. If the minimum bid is not met, the IRS can adjourn the sale to reevaluate the minimum bid, buy the property, or release the property back to the taxpayer.

What about perishable items?

If the IRS seizes perishable items such as food inventory or plants, it has the right to auction off those items sooner than the timeline noted above. However, PALS must still estimate the value and make a plan for the sale.

How does the IRS value ongoing business concerns or turn-key operations?

If dealing with an ongoing business concern or a turn-key business, the IRS does not have to include those elements when determining the fair market value before the auction. However, these items will ultimately bring in a higher price at auction. 

For example, if the IRS seizes all of your business's inventory, fixtures, and leasehold, and then auctions that off as part of a turn-key business package, the goodwill your business has may increase the value of the auctioned-off property. In this situation, the IRS may estimate the FMV of the business's tangible personal property at say $50,000, but when the IRS auctions off the business, its well-known phone number, customer lists, website, and reputation in the community increase its sale value to $200,000. 

Business Shutdown: Personal Vs. Business Tax Debts

Dealing with personal and business tax debts can get a bit murky, especially if you run a sole proprietorship. The IRS should issue separate levies for the owner and the business, but mistakes can happen. If you believe a levy was issued against your personal or business assets incorrectly, you should appeal the levy and reach out to a tax pro for help as soon as possible.

Can the IRS hold you personally responsible for business taxes?

Yes, the IRS may hold individuals responsible for unpaid business taxes, even if the business is an LLC. Under state law, an LLC's owner does not personally owe the LLC's debts related to bankruptcies or lawsuits, but for federal tax purposes, the LLC is considered to be the same entity as its owner. 

However, for certain excise taxes, including employment taxes paid on or after January 1, 2009, the LLC is always the liable taxpayer. The IRS cannot go after you individually for unpaid payroll taxes, but the agency can assess a Trust Fund Recovery Penalty against responsible individuals. 

Can the IRS seize business assets for unpaid personal taxes?

Generally, if the assets are owned by a corporation or an LLC, the IRS cannot seize them for unpaid individual income taxes. However, the IRS may be able to levy your distributional interest in an LLC. The IRS may also be able to seize an LLC's assets if it determines that the LLC is the alter ego of the individual taxpayer.

To give you an example, imagine that a single-member LLC owns a building, and the taxpayer who owns the LLC owes back taxes. Generally, the IRS would not be able to seize the building to cover the taxpayer's personal tax debts. However, if the IRS determines that the LLC only exists as an alter ego of the taxpayer or to evade payment of tax, the IRS can "pierce the corporate veil" and go after the LLC's assets.

What if the IRS is trying to seize my business assets for personal tax debts?

If the IRS incorrectly levies business assets for personal tax debts, you should appeal. The IRS must remove levies that have been issued incorrectly. 

The final notice of intent to levy should note your right to request a hearing, but if you're a single-member owner of an LLC, it should also include a disclaimer. For example, the disclaimer may note, "This notice attaches to all accounts in the name of John Smith as owner of JS LLC but does not attach to accounts established in the name of JS LLC.

Can the State Shut Down My Business for Unpaid Taxes?

Yes, most states have the right to seize your assets as the IRS does, but most states can also take away your sales tax license, professional license, or business license. States may also be able to revoke your LLC in some cases.

Every state has different tax codes and unique tax collection processes, but the ability to shut down your business and stop you from legally operating is fairly consistent from state to state. 

How to Save Your Business From Forced Closure

Now you know what the IRS can do if you don't pay your business taxes, how can you protect your business from forced closure? Keep these tips in mind:

• Stay Current on Tax Obligations - Make sure you understand your filing and payment obligations and stay on top of them.
• Use Tools to Help You Stay Compliant With Taxes - For example, software that withholds payroll taxes and sends them directly to the IRS may be easier than trying to budget for this tax on your own.
• Address Issues Promptly - Although collection notices can be scary, always reach out to the IRS proactively whether you're dealing with unpaid taxes, audit assessments, penalties, etc. 
• Look Into Payment Plans - The IRS offers a variety of payment plans. Usually, in-operation businesses can get up to two years to pay off back taxes, but you may be able to get more time if you provide the IRS with financial details and prove that you're paying the most possible.

The IRS also has hardship resolution options that may be available in select situations. In particular, the agency may settle for less than owed with an offer in compromise, let you make payments on a partial payment agreement, or stop collection actions after marking your account as currently non-collectible. These options are typically a last resort for a business with very limited income and assets.

To get help now, use TaxCure to find an experienced tax pro today. TaxCure is the only curated online directory of tax attorneys, CPAs, and enrolled agents who focus specifically on tax resolution work. With this platform, you can also narrow down your search to find pros who have experience directly related to tax levies and business taxes. Don't wait, get help and guidance today.