Understanding IRS Levies Part 2 – When Can the IRS Begin Seizing Assets? Published December 7, 2015
This is the second post in a three-part series on what lenders need to understand about IRS levies to foresee risks and mitigate exposure. Be sure to stay tuned for the third and final part of the series.
Part 1 of the the “Understanding IRS Levies” series addressed what assets of a company are at risk for levy which is valuable for lenders when viewing the assets of the business in the underwriting stage of the deal. If a prospect has a significant tax issues with numerous financial assets at risk of levy, then your exposure is likely to be increased and should be managed accordingly.
In part 2 of this series we’re going to move forward by taking a deeper look into how the timing of the IRS’ processes can affect lenders and help you measure the risks presented with this scenario.
When Can the IRS Begin Seizing Assets?
In order to answer the question of whether your client is at risk of an immediate or near-term levy, it’s best to understand how the IRS levy notification process and statutory requirements work.
To get a better sense of the scenario, imagine the IRS and your tax debtor client are in a proverbial schoolyard fight where the IRS dares the other to cross a line in the sand. In this case, the IRS actually draws the line multiple times before ever striking back. In fact, they have to before taking any levy action, although a few exceptions do exist:
1. The IRS can levy wrongfully by way of systemic or human error, which can be corrected with proper representation from a tax professional who has an understanding of the underlying rules and policies of IRS collection matters.
2. If your client is doing business with the federal government, or is subject to a jeopardy levy (trying to leave the country or exhibiting criminal behavior putting the collection of the debt in jeopardy), or issued a Disqualified Employment Tax Levy which gives the IRS a right to levy for collection of employment taxes without notice provided a certain set of criteria is met (typically this is for businesses with a history of non-compliance).
To the average person, every threatening letter the IRS sends appears to give the IRS the ability to issue a levy and proceed with seizing their assets. These notifications can be threatening in nature and quite confusing for people trying to make sense of where the final line in the sand actually lies.
Understanding The IRS’s Collection Notification Process
The reality is that notification stream usually has some order and process that allows for due process prior to any levy action by the IRS. IRS collection notices generally follow the path below prior to the act of levying by the IRS:
1. Balance Due – Typically the “nice” letter telling the debtor that they have a balance due and to “pay immediately”. Example IRS Balance Due Letter.
2. Reminder, Balance Due – The next line in the sand. This notice is more threatening stating to the debtor that if they “don’t pay…we have the right to seize (“levy”) your property. Example IRS Reminder, Balance Due Letter.
3. 2nd Notice, Balance Due – Typically this will be the same notice as the “Reminder” but list a different notice number. Example IRS 2nd, Notice Balance Due Letter.
4. Final Notice, Balance Due – This line in the sand tells the debtor they they have a stated date to pay in full or they may “seize…property”. Still no levying by the IRS yet. Example IRS Final Notice, Balance Due Letter.
5. Final Notice of Intent to Levy and Your Right to a Hearing – The final-final line in the sand. Now the IRS may start proceedings to take assets. Typically, this notice will arrive as Letter 11 or Letter 1058. Under normal circumstances, the IRS waits 30 days after the date of this letter before taking action, if they choose to levy. Since the IRS doesn’t provide an example letter, the best replica is the following CP 90 which also advises the debtor of the Collection Due Process rights to a hearing: Example IRS CP 90 Letter
This entire notification process can take months to cycle through. However, in cases that involve high-dollar amounts or certain business accounts, the IRS may sometimes go straight to the Final Notice of Intent to Levy. They can skip the entire early notification process, but must issue the Final Notice in order to issue a levy.
What Does This Timeline for Seizures Mean for Commercial Lenders?
Some of this information can feel like inside baseball statistics, but knowing where your clients are in the IRS collection process helps you understand the level of risk that the client presents to you in real time.
The path that the IRS takes to seize assets is not always clear or easy to interpret, but one thing should be clear – when a prospect or client has an IRS tax liability it’s imperative to dig in beyond just looking for liens to understand their current and historical tax compliance. It is only then, when armed with this holistic view, that commercial lenders can proceed with the certainty required to effectively mitigate exposure and to foster successful funding relationships.
The existence of a tax liability with one of your prospects or clients, doesn’t have to mean that the business is knocking on the door of insolvency or that you shouldn’t fund them. It requires some insight, investigation, and at times creativity to get a deeper understanding of their true standing with the IRS. However, understanding what assets are at risk is only part of the risk mitigation picture.
Stay tuned for part 3 of the series, where we’ll take a look at the current levy trends at the IRS so you can be aware of the current state of affairs at the IRS and manage risk accordingly.