What to Do if the IRS Imposes a Payroll Levy on Your Business

Immediate steps to take when you receive a payroll levy

1. Confirm the notice and deadlines

• Read the levy notice carefully and confirm it’s an actual IRS notice (look for the IRS seal, contact information, and a tax period and amount). Scams exist; if in doubt, call the IRS at the number on IRS.gov—not the phone number on a suspicious letter.
• Note the date the levy takes effect and the date by which you must act. The IRS generally issues a “final notice” (a Notice of Intent to Levy and Notice of Your Right to a Hearing) at least 30 days before enforcing a levy. If you timely request the statutory hearing (Collection Due Process/CDP), the levy is generally suspended while the appeal is pending. (IRS: “Levies” and “Collection Due Process”)

1. Preserve payroll and bank information

• Immediately quarantine the amounts that correspond to the levy (do not spend them). Gather payroll schedules, deposit histories, payroll tax returns (Form 941/944), bank statements, current cash-flow projections, and copies of the levy notice.
• Document the dates you received the notice and any communications with the IRS. In my practice, the single most important step clients skip is preserving contemporaneous bank and payroll records—they’re critical when asking for a partial release or proving undue hardship.

1. Notify your payroll processor and employees (as required)

• If you use a payroll service, inform them of the levy so funds aren’t accidentally distributed. The levy may require you to forward certain withheld amounts to the IRS rather than to employees.
• Don’t withhold employees’ legally required wages. If the levy applies to funds you already withheld (trust fund taxes), those amounts are property of the government once withheld and must be treated accordingly.

Understand your rights and why speed matters

• You have procedural rights. Before the IRS levies, it must mail a notice and demand for payment and then a final notice of intent to levy. You have the right to request a Collection Due Process (CDP) hearing or an Equivalent hearing in many circumstances; requesting a timely hearing stops most levy actions while the case is considered. (IRS: “Your Appeal Rights and How To Protect Them”)
• The levy can be released if the IRS determines it’s creating an immediate economic hardship (for example, making it impossible to pay employees or threatening business survival). This is discretionary but a common and effective reason for release when supported by current financial statements.

Common immediate remedies to stop or limit the levy

1. Pay the tax liability in full

• The simplest way to stop a levy is to pay the assessed tax, penalties, and interest in full. If you can secure short-term financing to cover the balance, the levy will be released once payment posts.

1. Enter an installment agreement

• You can apply for an installment agreement to pay over time. Approvals are fact-specific; for business payroll tax liabilities, the IRS will review cash flow and ability to pay. Setting up an agreement promptly usually results in release or partial release of levy actions if payments begin on schedule. (IRS: “Apply for a Payment Plan”)

1. Offer in Compromise (OIC) or Effective Tax Administration

• An OIC lets you settle for less than full liability if you qualify, based on doubt as to collectibility or effective tax administration. OIC processing can take months; ask the IRS to release a levy temporarily while you pursue the OIC if you can show immediate hardship. (IRS: “Offer in Compromise”)

1. Request a levy release for economic hardship

• Provide current bank statements, a profit-and-loss statement, and a projection showing inability to meet ordinary operating expenses and payroll. In practice, a well-documented hardship package often persuades IRS field or collection officers to release a levy temporarily to avoid forcing a business to close.

1. Prove the levy is wrong (wrong taxpayer or incorrect amount)

• If the levy was sent against the wrong EIN/SSN or the amount is clearly wrong, gather supporting documents (payroll tax returns, deposit receipts) and request an immediate release. The IRS will usually suspend collection action while it verifies your evidence.

How to request a hearing and what it does

• Timely request a Collection Due Process (CDP) hearing or an Equivalent hearing as described on the Final Notice. A CDP hearing is available for many taxpayers who receive a final notice; it stays (pauses) collection actions while the protest is pending. Use the IRS instructions in the notice to request the hearing—missing that deadline can limit appeal rights.
• In a hearing you can propose payment options (installment agreement, OIC), argue the levy was issued in error, or request a release on hardship grounds.

Who can be held personally liable: Trust Fund Recovery Penalty (TFRP)

• Employers must withhold federal income tax and the employee portion of FICA (Social Security and Medicare) and deposit those funds timely. Those withheld funds are treated as held in trust for the government. Responsible persons who willfully fail to collect or remit these taxes can be assessed the Trust Fund Recovery Penalty (TFRP), making them personally liable. TFRP is a civil penalty but can be substantial, and criminal charges are possible in willful cases. (IRS: “Trust Fund Recovery Penalty”)

Practical documentation checklist to prepare immediately

• Copy of the IRS levy notice and any prior notices.
• Payroll tax returns for the affected periods (Form 941/944), bank deposit history for payroll accounts, and payroll processor reports.
• Current bank statements for accounts identified in the levy.
• A concise cash-flow statement showing payroll needs for the next 30–60 days and projected business receipts.
• Proof of payments you already made (deposit receipts, canceled checks).

How I typically help businesses (professional perspective)

• First, I confirm whether the levy is valid and whether any deposits are misapplied (errors happen). Next, we prepare a hardship package or negotiate an installment agreement—often combining a partial payment to stop immediate enforcement with a workable monthly plan.
• For clients facing potential personal liability (TFRP), I analyze who qualifies as a “responsible person” and whether there is evidence to challenge willfulness. In several cases I’ve reversed proposed personal assessments by documenting that the individual lacked authority over payroll or that payments were made whenever funds were available.

When to involve the Taxpayer Advocate or counsel

• If you can’t get a timely or reasonable response from the IRS and the levy threatens business survival, contact the Taxpayer Advocate Service (TAS). TAS is independent within the IRS and helps taxpayers who face significant hardship and slow IRS action.
• If there are allegations of criminal conduct or a complex TFRP exposure, consult a tax attorney promptly.

Long-term steps to prevent future levies

• Stay current with deposit rules and deposit schedules. Payroll tax deposit frequency (monthly vs semiweekly) is determined by the size and timing of your payroll tax liability. Missing deposits is the most common trigger for aggressive collection. (See: “How Quarterly Payroll Deposits Are Calculated and When They’re Due” and “Payroll Deposit Penalties: Causes and Corrections”.)
• Implement internal controls and separation of duties for payroll, reconcile payroll tax liabilities each period, and keep payroll funds in an account dedicated to payroll taxes where possible.
• Consider working with an experienced payroll provider and an accountant who monitors payroll tax deposits.

FAQs — quick answers

• Will a payroll levy stop employees from getting paid? A levy can redirect funds you were holding for payroll. If the IRS levies your payroll account, funds earmarked for wages may be seized; a fast emergency action (installment agreement or hardship release) is essential to avoid missed paychecks.
• Can I be personally liable for the business’s payroll taxes? Yes—responsible persons can be assessed the Trust Fund Recovery Penalty for willful failure to remit withheld taxes.
• Does filing bankruptcy stop an IRS payroll levy? Bankruptcy may affect priority and dischargeability, but payroll tax liabilities, and certain penalties, have special rules. Consult bankruptcy counsel before assuming automatic protection.

Useful authoritative resources

• IRS — Levies: https://www.irs.gov/businesses/small-businesses-self-employed/levies
• IRS — Understanding Your Payroll Tax Obligations: https://www.irs.gov/businesses/understanding-your-payroll-tax-obligations
• IRS — Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise
• IRS — Trust Fund Recovery Penalty (TFRP): https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty

Internal resources on finhelp.io

• For help understanding the notice that led to a levy, see: How to Respond to a Payroll Tax Notice from the IRS.
• To reduce the risk of future levies, read: Payroll Tax Basics for New Small Business Owners.
• If your issue arose from missed deposit timing, this resource is helpful: Payroll Deposit Penalties: Causes and Corrections.

Final notes and disclaimer

This guide provides general information about how to respond to an IRS payroll levy. It is educational and not a substitute for personalized legal or tax advice. If your business is levied, act quickly: gathering records and proposing a realistic solution (payment, installment agreement, or hardship release) is usually the fastest path to a release. For complex cases—especially those involving potential personal liability or criminal exposure—consult a qualified tax professional or tax attorney immediately.