What is a Tax Levy? | Guide

In the startup world, staying financially nimble is essential. 

While this usually involves managing your team and budget well, it also means preparing for financial challenges such as tax levies. No one wants to deal with a tax levy, so smart tax planning is a must

Discover what a tax levy is and how effective tax planning can help secure a stable financial future for your business.

What is a Tax Levy?

So, what is a tax levy? A tax levy is a government's lawful claim to seize property or funds to satisfy a tax debt. Think of it as a direct intervention by the government to ensure it collects the annual taxes owed. While federal tax liens with public notice are more of a warning or a claim against property, a tax levy involves the actual confiscation of property.

A federal tax lien is a public document that credit reporting agencies can see and include in your credit report. However, an IRS tax levy is not on public record and should not affect your credit score. It's simply an action taken by the government to ensure it receives the unpaid taxes.

Seizable assets aren't just limited to tangible property such as bank accounts and equipment. Assets also include intangible resources, real estate, potential future earnings, and wages. A tax levy can impact all of these, disrupting both current operations and future growth.

You may be eventually granted a levy release, but it is not guaranteed. It's best to avoid the situation altogether by engaging in effective tax planning and staying on top of financial obligations.

Tax levies and their significance

When the government asserts its right to seize funds or assets due to unpaid tax liabilities, the consequences can ripple beyond your finances. Because tax levies can disrupt operations, they can damage your business’s reputation with both vendors and customers.

Tax levies underscore the non-negotiable nature of tax obligations. They are the government's way of ensuring tax compliance, demonstrating the seriousness with which you should treat tax obligations. Ignoring them doesn't just jeopardize assets; it can compromise your startup.

Key elements of tax levy processes

Tax levies may seem complicated, but the process has only four stages. Here, we'll explore the different stages of the tax levy process.

Initiation of levy

The initial stage involves repeated communication attempts from the IRS. This is simply meant to notify the taxpayer about their outstanding tax levy fee and guide them toward resolution options.

But what is a tax levy fee?  It is the amount owed to the government for tax purposes. A levy fee includes all costs associated with tax penalties, interest, and any other fees.

At times, a simple oversight or miscalculation might be the root cause of the owed amount. This phase gives the taxpayer an opportunity to pay what they owe, which can prevent it from snowballing into a major issue.

Legal notification and process

Taxpayers are given lots of notice before a levy is imposed. The first major red flag a taxpayer is sent is the "Notice and Demand for Payment." It details the owed amount and provides guidelines for repayment.

If you don't pay or communicate with the tax authorities, they will send you a final warning and give you a chance to resolve the issue. This is called the "Final Notice of Intent to Levy and Notice of Your Right to A Hearing." It's your last opportunity to take action before the government puts a levy in place.

It also provides a timeframe (often 30 days) for the taxpayer to either settle the debt or make alternate arrangements. This is the moment to either marshal resources for payment, negotiate a payment plan, or seek professional advice.

Seizure of assets

A tax levy on assets is a legal seizure of property that gives the tax agency the right to take the property and sell it to satisfy your back taxes. If communication fails and you ignore the final levy notice, the tax agency can take your assets. This is the most serious stage of a tax levy and can be particularly dangerous for startups.

There are many different types of property the IRS can seize. Tangible assets, like office equipment, vehicles, real property, state tax refunds, or personal property, are on the line.

Financial assets, including bank account funds and owed payments (accounts receivables), are also vulnerable. Bank levies freeze your accounts for 21 days, after which the bank remits the seized funds to the IRS. The government can even implement a wage levy, where a portion of your wages are garnished and redirected to the IRS.

For a startup, this collection process can mean the sudden freezing of vital operational funds or the loss of tools and equipment integral to its business operations.

Auction and sale of seized assets

Once the government seizes assets in the collection action, they undergo an evaluation and are funneled into public auctions. This auction is how the government converts seized properties into funds that will offset the taxpayer's debt.

For startups, this can have multiple repercussions. First, the loss of assets can disrupt business operations. Second, the public nature of these auctions can attract unwanted media attention, potentially tarnishing the brand's reputation.

The auction process itself is highly structured. Assets are often listed with detailed descriptions, and prospective buyers have the chance to inspect them before bidding. The proceeds from the sales are then applied to the outstanding tax debt.

If there's a surplus after settling the debt, it's returned to the original taxpayer. But, if the auctioned assets do not cover the full debt amount, the taxpayer remains on the hook for the difference.

Secure your financial future through effective tax planning

The following are a few steps your business can take to avoid tax levies.

• Educate and update: Tax codes evolve. Regularly educate your team and keep up-to-date on changes to ensure you're not in violation.
• Consult experts: A proficient tax consultant can be a startup's best investment. Their insights can streamline compliance, identify potential savings, head off issues before they escalate, and ensure your tax returns are error-free.
• Maintain transparency: If financial challenges arise, open a dialogue with the tax agency. It may be open to negotiation or installment plans, potentially avoiding the levy process.
• Routine audits: Periodic internal reviews of financial statements can catch discrepancies or overlooked tax obligations. Addressing them preemptively can save a lot of heartache and economic hardship.

The concept of a tax levy is a stark reminder of how important it is to stay on top of your obligations. For startups, where the margin for error is often razor-thin, understanding and proactively addressing potential startup tax issues is not just advisable — it's essential.

With a bit of knowledge and astute planning, you can navigate the labyrinth of tax challenges and better secure your business's financial future.

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