Small Business Tax Tips
Dealing with IRS Employee Levies
Ignore an IRS employee tax levy notice at your own peril. Failure to respond can result in significant penalties.
Most business owners would never dream of ignoring regular payroll withholdings or other IRS requirements.
But when it comes to employee wage levies, some small businesses choose to ignore notices from the IRS. That's a mistake because the penalties for non-compliance with wage levies can be painful on the pocketbook.
The IRS has the right to seize an individual's property or levy his wages as satisfaction for unpaid taxes. However, this usually occurs as a last resort, following a long process of collection attempts and opportunities for the taxpayer to contest the amount he owes. If that process fails, then the IRS can assess the levy through the taxpayer's employer.
Employers generally resent wage levies because they put them in the position of an intermediary between the IRS and an employee. Although there is nothing in it for you, the IRS does not give employers the option of contesting wage levy because (from their perspective) it has nothing to do with you. The issue is between them and the taxpayer, and like it or not, you are just a resource that is legally-bound to collect their money for them.
Consequences of Non-Compliance
Not surprisingly, the penalties for not complying with an IRS levy notice can be severe. According to the tax code, parties who have the obligation to respond to a levy but fail to do can be held responsible for the taxes, interest, and penalties on the levy. Non-complying parties can also be held responsible for collection costs and an additional penalty up to 50% of the tax due. The bottom line is that your failure to comply with a levy notice could cause the unpaid taxes (and more) to be paid by your company instead of your employee.
The legal system has affirmed the IRS's ability to penalize employers who refuse to comply with levies and has unequivocally stated that the burden of risk for non-compliance lies with the third-party, i.e. the employer. But the good news is that the courts have also ruled that employers cannot be sued by an employee for complying with a levy notice. In other words, your company's legal exposure is limited exclusively to non-compliance. If you comply with the levy, you cannot be penalized.
Response to a Levy Notice
Even though you have ten days (from the mailing date) to begin withholding for a levy, you will need to initiate your response as soon as you receive the notice from the IRS. The levy notice should include instructions about notifying the employee and the employee's completion of a Statement of Exemptions and Filing Status document. They have three days to complete this document and return it to the employer so the withholding process can begin.
The levy notice should also contain instructions about how to assess the levy (net pay minus exemptions) and forward it to the IRS. If the levy of a single pay period is not enough to repay the amount of the levy notice, the levy must continue until the employee's tax obligation has been completely fulfilled.
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Additional Resources for Entrepreneurs
Dealing with IRS employee levies is a necessary evil that should not be overlooked. If you've got additional comments or questions on this topic, post them below.