What happens if an employer continues to incur new payroll tax liabilities?
The employer will receive several notices from the taxing authorities regarding the outstanding balances due. Eventually, if the employer does not respond to the notices received or does not pay the outstanding tax, the IRS can proceed with enforced collection action such as levies against the company bank accounts, accounts receivables, and other income sources. Generally, before the IRS issues a levy, they must provide the taxpayer with the Final Notice of Intent to Levy for each tax period, which provides the taxpayer with appeal rights prior to any proposed levy action. A taxpayer can request an appeal by filing a Request for a Collection Due Process Hearing (CDP), Form 12153. The Collection Due Process Hearing will protect the taxpayer from any levies for the tax period(s) specified on the CDP request up until the actual hearing plus an additional 30-days from the Notice of Determination.
If however, a taxpayer has had a Collection Due Process Hearing (CDP) within the last two years, and continues to incur new employment tax liabilities, the IRS can bypass their notice requirements (IRC 6330) and issue a levy on the new tax period via the “Disqualified Employment Tax Levy” (DETL). The taxpayer will not be provided with the Final Notice of Intent to Levy on the new tax period, CP-1058 or LT-11. As a result, the taxpayer is not provided with the opportunity to file the request for a CDP hearing prior to a proposed levy action. So, employers beware. The IRS must, however, issue the CP-504B Notice of Intent to Levy prior to any levy action. Otherwise, any levy will be considered an “illegal levy”.
What can an employer do if the IRS issues a “Disqualified Employment Tax Levy” (DETL)?
First, the employer can try to work with Collections to request partial or full release of levy to cover the amount due to cover payroll. Generally, the employer will have to provide proof of payroll and a copy of the most recent bank statement. Most times, the IRS will release the amount to cover payroll. However, if the employer continues to incur new tax liabilities, and is not in compliance with their tax filings and their federal tax deposits, the IRS will be less likely to do a partial or full release of the levy.
Second, if Collections does not want to do a full or partial release of levy, the taxpayer can file an appeal via the Collection Appeal Program (CAP), Form 9423. Usually, the hearing will be held within two weeks of filing the CAP. Be careful, if the IRS issued a bank levy, the taxpayer has 21-days to release the levy before the bank sends the funds to the IRS. If the 21-days expire and the IRS receives the funds from the levy, it is very difficult to get the funds back unless the IRS issued an erroneous levy.
Also note that the CAP hearing only addresses the issue of whether Collections followed proper procedure. If Collections did not follow proper procedure, the levy will be released. However, if Collections followed procedure, the levy will not be released and the case will go back to Collections (from Appeals).
Please keep in mind that there are other consequences associated with delinquent payroll tax liabilities. The IRS will file federal tax liens for every tax period with a balance due. The IRS will also conduct a Trust Fund Recovery Penalty Investigation to personally assess a portion of the payroll taxes to the responsible person(s). The IRS will personally assess one or more individual(s) (officer, Controller, CEO, CFO, etc.) the amount of the federal income tax withholdings, one-half of social security and one-half of Medicare taxes that was deducted from the employees’ paychecks. Eventually, if the employer does not change and get current, the IRS can proceed to shut down the business.