Can the IRS take money from LLC?

Limited liability companies (LLCs) provide business owners with personal liability protection, as well as flexibility in taxation. However, LLCs are not immune from owing taxes or having the Internal Revenue Service (IRS) take enforced collection actions against the business. Here is an overview of whether and how the IRS can take money from an LLC:

Table of Contents

Does an LLC have to pay taxes?

Yes, an LLC must pay applicable federal, state, and local taxes. This includes:

Federal income tax
Self-employment tax
Employment taxes if the LLC has employees

Excise taxes
State income tax in states that levy an income tax
State sales tax if the LLC sells taxable goods or services

Local taxes such as occupational taxes or business license fees

An LLC does not pay federal income taxes itself. Instead, the LLC’s profits and losses pass through to the owners’ personal tax returns. The owners then pay individual income taxes on their share of the LLC’s income, whether or not profits are distributed. This is known as pass-through taxation.

When can the IRS take money from an LLC?

The IRS can levy LLC funds to collect unpaid taxes if the LLC fails to voluntarily pay taxes owed. Common situations where this may occur include:

The LLC did not make estimated tax payments during the year
The LLC underpaid its taxes when filing the annual return
LLC owners did not pay their share of pass-through taxes

The LLC failed to pay employment taxes
The LLC did not pay other taxes owed to the IRS

Before levying funds, the IRS must send the taxpayer Notice and Demand for Payment. This gives the taxpayer an opportunity to voluntarily pay the tax debt. If the taxpayer still does not pay, the IRS can pursue enforced collection actions.

What assets can the IRS levy?

If an LLC owes back taxes, the IRS can levy the following assets:

Bank accounts – The IRS can levy LLC bank accounts to seize cash.
Accounts receivable – The IRS can levy payments owed to the LLC by customers and clients.

Tools, equipment, and inventory – Physical business assets may be seized and sold.
Rents and royalties – If the LLC earns rental income, the IRS can seize these payments.
Commissions – The IRS can levy commissions owed to the LLC.

Real estate – IRS property seizures are rare but can happen if no other assets are available.

One asset the IRS cannot seize is an LLC owner’s personal bank account, retirement account, or other assets not owned by the LLC itself. This demonstrates how LLCs provide liability protection to owners.

Does the IRS need a court order to levy LLC assets?

In most cases, the IRS does not need court permission to levy LLC funds for unpaid taxes. The IRS can:

Issue a Notice of Levy to the LLC’s bank, accounts receivable payers, etc. This requires them to submit owed payments to the IRS.
File a Notice of Federal Tax Lien that publically states the IRS claim against all LLC assets and income.
Issue a Notice of Seizure to seize LLC assets such as equipment.

The IRS would need a Writ of Entry from a federal district court to enter private LLC property and seize assets. A court order is also required for the IRS to levy real estate.

Can the IRS take money without warning?

The IRS cannot levy LLC funds without first sending written notice and providing Chance for Appeal. Specifically, the IRS must:

Send Notice and Demand for Payment – Gives taxpayer opportunity to voluntarily pay debt.

Issue Notice of Intent to Levy – Warns a levy will be issued in 30 days if payment not made.
Send Final Notice of Intent to Levy – Issued after 30 days if no payment.
Allow Collection Due Process Appeal – Taxpayer can file an appeal within 30 days of receiving levy notice.

Actually issue the Notice of Levy if appeal unsuccessful or not filed.

This administrative process can take several months. The IRS cannot simply raid an LLC’s bank account without extensive advance notice and due process.

Can the IRS take everything?

The IRS cannot clean out all LLC funds when issuing a levy. There are important limitations:

Only funds owed for specific tax periods can be levied. The IRS must levy in a reasonable manner.
Funds are only levied if no other reasonable alternative for collecting exists.
LECs are entitled to Collection Financial Standards for allowable expenses.

The LLC can request a Installment Agreement to make manageable payments.
Currently Not Collectible status is available if levies would create hardship.

The IRS also utilizes bank account levies over asset seizures when possible. This minimizes business disruptions in most cases.

How can an LLC respond to an IRS levy?

An LLC has the following options to challenge or respond to an IRS levy:

Request Collection Due Process Hearing – Argue against the levy within 30 days of receiving notice.
Submit Offer in Compromise – Settle tax debt for less than amount owed.

Request Installment Agreement – Pay over time in monthly payments.
Apply for Currently Not Collectible Status – Pause levies if they prevent paying basic living expenses.
File bankruptcy – Stop IRS collection, but taxes will continue accruing.

Pay tax debt in full – Stops levy process.
Get IRS penalties abated – Reduces amount owed.

Quick action after receiving IRS notice can help stop a levy from occurring. It’s critical to immediately address IRS collection letters.

Can the IRS garnish an LLC owner’s wages?

The IRS can garnish the wages or personal bank accounts of an individual LLC owner who is personally liable for unpaid taxes. Situations where this could occur include:

Sole proprietor LLC – Owner reports taxes on Schedule C, so is personally responsible.
Single-member LLC – No entity-level liability protection from IRS.

LLC partner or shareholder – Must pay their allocable share of LLC tax liability.
LLC responsible person – Person responsible for collecting, accounting for, or depositing payroll taxes.

However, for a multi-member LLC taxed as a partnership, the IRS cannot garnish wages or personal accounts of members not responsible for the LLC’s taxes.

How can an LLC prevent IRS collection actions?

LLCs can take the following steps to avoid having the IRS take money or pursue enforced collection:

Stay current on estimated tax payments to avoid penalties.
Carefully file annual tax returns and pay balance due on time.

Have a designated tax manager monitor IRS notices and immediately address issues.
Appeal any questionable IRS penalties for abatement when possible.
Be proactive in setting up Installment Agreements if falling behind on taxes.

Have a business banking account dedicated solely to paying taxes.

Prevention is truly the best solution. It’s much easier to avoid IRS collection actions than to undo them after the fact.

Conclusion

LLCs provide invaluable liability protection. However, LLCs must fulfill tax obligations, and the IRS can pursue collection actions for unpaid taxes. With advance notice, due process rights, and collection limitations in place, IRS levies should only occur as a last resort. Proactive tax management and responding quickly if issues arise can help LLCs maintain positive standing with the IRS.