When a business fails to pay employment taxes (also known as payroll taxes), it opens the door to aggressive collection actions. One of the most serious is the disqualified employment tax levy, which allows the IRS to seize your assets without offering another Collection Due Process (CDP) hearing.
A disqualified employment tax levy typically applies to employers who have already requested a CDP hearing for earlier unpaid employment taxes. Because they’ve already had the opportunity to appeal, they generally lose the right to challenge any new levy actions for similar unpaid tax periods.
At Victory Tax Lawyers, we’ve helped countless businesses navigate complex IRS rules and fight back against aggressive collections. If you have lost your CDP rights, you are not out of options. Schedule a free consultation now and let us walk you through the process.
This guide explains what a disqualified employment tax levy is, why it bypasses your right to a hearing, and shows you the steps to take to obtain relief.
What Is an IRS Tax Levy?
An IRS tax levy is a legal action that allows the IRS to seize your property or funds to collect unpaid taxes. It’s not the same as a federal tax lien. A tax lien only serves as a public notice that the IRS has a legal interest in your assets. But when the IRS places a levy on your account, it is getting ready to make moves to forcibly take your property to liquidate your tax debt. When a levy is placed on you, the IRS moves from claim to actual collection.
Both liens and levies can damage your business credit, disrupt operations, and lead to loss of assets. The IRS can garnish your wages, drain your bank accounts, and even seize business property. Fortunately, they’re required to send proper notice before initiating these actions. This is the chance you have to respond or seek legal help.
What Is a Disqualified Employment Tax Levy?
A disqualified employment tax levy refers to a levy that the IRS is not allowed to enforce right away because you or a predecessor made a timely CDP hearing request for those taxes within the past two years. Normally, the IRS must issue a Final Notice of Intent to Levy and give you a 30-day notice to request a Collection Due Process (CDP) hearing before proceeding with collection.
However, in this case, that requirement is waived. The IRS no longer sees the need to give you the typical 30-day warning before seizing your assets, as it believes your hearing rights have already been exercised.
When Is the Levy Considered “Disqualified”?
A levy is considered “disqualified” when:
- You have unpaid employment taxes, and
- You have already requested a hearing for those same taxes within the past two years.
Because your CDP rights have already been used, the IRS can go ahead to enforce the levy without giving you a new 30-day notice. In essence, the levy becomes “disqualified” from the usual waiting period, and the IRS can go on to collect immediately.
What Triggers a Disqualified Employment Tax Levy?
As we’ve tried to establish, a disqualified employment tax levy is triggered when you have employment back taxes and you’ve requested a CDP hearing for those same taxes. Because the IRS has already recently granted you a CDP hearing, it no longer deems it necessary to issue another 30-day notice before enforcing a levy. In essence, your previous CDP request “disqualifies” your levy from the normal notice-and-wait requirement.
In practice, this means that the IRS no longer has to inform you of its decision to seize your assets, as your due process rights for that tax period have already been exercised. Businesses that repeatedly ignore their payroll tax responsibilities, such as missing deposit deadlines, filing payroll tax forms (like the quarterly Form 941), or withholding but not remitting taxes, are considered high-risk and often subject to aggressive collection actions, including disqualified levies.
The disqualified employment tax levy rule applies to unpaid federal payroll taxes, like Social Security, Medicare, and income taxes withheld from employees’ paychecks. It also covers the Trust Fund Recovery Penalty (TFRP). This means business owners or managers can be personally held responsible if these taxes aren’t paid. This rule affects all types of businesses, whether small or large.
Are There Any Exemptions for Disqualified Employment Tax Levies?
Generally, there are no exemptions for disqualified employment tax levies. Once a levy is considered “disqualified,” it means the IRS has already issued a Final Notice of Intent to Levy and given the employer a chance to request a Collection Due Process (CDP) hearing. If the employer either used that opportunity or failed to respond within the 30-day deadline, the IRS is no longer required to provide another notice before issuing a new levy.
How Does a Disqualified Levy Affect Your Business?
A disqualified employment tax levy fast-tracks IRS collection actions and significantly jeopardizes your chances to appeal, dispute the debt, or negotiate a resolution in advance. This means the IRS is allowed to seize your business assets, including your bank accounts, accounts receivable, and equipment, without issuing you a new 30-day notice.
This can be especially damaging to your business because the levy can come without warning, thereby freezing cash flow and disrupting your operations overnight. Unlike a typical levy situation, you may not have time to prepare or negotiate in advance.
If you’ve been levied or are at risk of enforcement actions, working with a qualified tax attorney is key. With their expertise, you can protect your business, explore relief options available to you, and minimize the long-term financial damage that is a usual consequence of collection actions.
What Are the Consequences of Not Paying a Disqualified Employment Tax Levy?
Failing to pay a disqualified employment tax levy or ignoring the underlying payroll tax debt can lead to serious consequences for your business. In the short term, this can include wage garnishments, bank account levies, and seizure of business assets such as vehicles or accounts receivable.
Long-term consequences are even more severe. Interest and penalties will continue to accrue, increasing the total amount you owe. If the IRS determines that responsible parties willfully failed to collect or remit employment taxes, it may assess the Trust Fund Recovery Penalty (TFRP) against individuals within your business.
In extreme cases, unresolved payroll tax issues can lead to litigation or criminal investigation, especially if the IRS suspects intentional tax evasion. To avoid escalating legal and financial risks, it’s essential to take immediate action, ideally with professional representation.
What to Do If You Receive Notice of a Disqualified Levy
If you’ve received notice of a disqualified levy, time is not on your side. Here are the key steps to take immediately to protect your rights and avoid further IRS action:
1. Contact a Tax Professional Immediately
If you receive notice of a disqualified employment tax levy, do not ignore it. Time is critical. Even though the levy may be invalid due to a pending Collection Due Process hearing, it still signals that the IRS is serious about collecting your unpaid employment taxes. Failing to respond appropriately can lead to renewed collection efforts once the CDP process concludes.
The best course of action is to contact a qualified tax professional immediately. Whether it’s an Enrolled Agent (EA), Certified Public Accountant (CPA), or experienced tax attorney, a skilled representative can evaluate your situation, help you understand your rights, and take swift action to protect your assets. These professionals are trained to communicate with the IRS, file the proper documentation, and guide you toward a resolution.
2. Request a CDP Hearing Before the Deadline
If you receive a Final Notice of Intent to Levy (such as LT11 or Letter 1058), you typically have just 30 days to request a Collection Due Process hearing. Acting within this timeframe is crucial. You don’t want to miss the deadline, so you don’t forfeit your right to challenge the levy through a CDP hearing. Don’t forget to keep copies of all submitted forms and any communication with the IRS for your records.
3. Prepare Financial Documentation
Another important step you can take is to get your financial documentation in order. This includes gathering recent tax returns, profit and loss statements, payroll records, and bank statements. These documents can help demonstrate your current financial situation and show whether you’re unable to pay in full or need time to repay.
Having clear, organized records gives your tax professional the information they need to present your case effectively and can open the door to payment alternatives like installment agreements or offers in compromise.
4. Respond Promptly to IRS Notices
Always respond promptly to any notices you receive from the IRS. These letters often include strict deadlines, and missing them can lead to more aggressive collection actions. If you need additional time, you can request an extension, but be sure to document every step of your communication with the IRS. Keep a close eye on your mail and regularly check your IRS online account for updates or new correspondence.
Tax Relief Strategies for a Disqualified Employment Tax Levy
The IRS offers several tax relief options to help you manage or reduce your debt while avoiding further financial damage. They include:
- Installment Agreements
This is one of the most commonly used tax relief options. An installment agreement, also known as a payment plan, lets you pay your tax debt over time through monthly payments. It’s effective for businesses that can’t afford to pay in full but have a steady cash flow. While interest and penalties continue to accrue, it prevents more aggressive collection actions like bank levies or asset seizures.We once worked with a retail store with over $30,000 in payroll tax debt. They were able to continue operations after we successfully negotiated a streamlined installment plan with the IRS, allowing them to spread payments over 36 months. - Offer in Compromise (OIC)
If you’re facing serious financial hardship, you may qualify to settle your tax debt for less than what you owe through an OIC. This is more difficult to obtain, as you must prove that paying the full amount would create undue hardship. However, when approved, it can significantly reduce your liability.For instance, a particular construction company was struggling after a series of cancelled contracts. We were able to successfully negotiate an OIC with the IRS. This gave them a tax cut that reduced their $60,000 tax bill to just $12,000 based on their limited ability to pay. - Currently Not Collectible (CNC) Status
When a business has no ability to pay, and doing so would jeopardize its ability to cover basic expenses, it may qualify for CNC status. This temporarily halts IRS collection efforts, although the debt isn’t forgiven, and penalties may continue to build.We know of a seasonal business that was impacted by an economic downturn. Luckily, they were granted CNC status for a year, giving them the breathing room to recover without facing levies or wage garnishments. - Penalty Abatement
The IRS may agree to remove or reduce penalties if you can show that the failure to comply was due to reasonable cause, such as illness, natural disaster, or reliance on bad professional advice. This doesn’t erase the underlying tax debt, but it can ease the financial burden.In another case, we had a consulting firm come to us. We were able to consolidate their request by proving that their tax advisor failed to file their returns correctly during the pandemic. They were granted penalty abatement, eliminating nearly $8,000 in late payment penalties. - Collection Due Process (CDP) Hearing
If you receive a final notice of intent to levy, you have the right to request a CDP hearing within 30 days. This gives you a chance to dispute the levy, propose a payment plan, or raise other legal arguments. Once the 30-day window closes, your appeal rights shrink dramatically.A small manufacturing company used this strategy to avoid a bank levy. After filing for a CDP hearing and presenting a proposed installment agreement backed by financial records, the IRS heeded their request.
Each strategy comes with specific eligibility requirements and varying degrees of complexity. Choosing the right one often depends on your business’s cash flow, its asset structure, and past compliance history. For many taxpayers, working with a tax attorney can increase the chances of approval and save time, stress, and money in the long run.
How to Avoid Employment Tax Issues in the First Place
The best way to deal with a disqualified levy is to avoid employment tax issues altogether. Here are some proactive steps employers can take to stay compliant and off the IRS’s radar.
- Stay Current on Payroll Taxes
Deposit all required employment taxes on time, including withheld income tax, Social Security, and Medicare. Late or missed payments are one of the fastest ways to trigger IRS action. - Use a Reputable Payroll Provider
A trusted payroll service can help manage tax calculations, filings, and deposits. Always verify that your provider is submitting payments on your behalf. - Regularly Review IRS Notices
Don’t let important IRS letters go unopened or unanswered. Many contain time-sensitive information that requires a response. - Don’t Ignore IRS Letters
Even if a notice seems routine, always follow up. Delaying action can result in penalties, interest, and loss of appeal rights.
Is the IRS Targeting Your Business?
A disqualified employment tax levy gives you a window of protection, but it’s not permanent. Take action now before the IRS resumes collection. With the right help, you can use this time to resolve, dispute, or negotiate your payroll tax debt confidently.
Don’t risk losing your business over unpaid taxes. Schedule a free consultation with Victory Tax Lawyers today and let our experienced attorneys fight for your financial future.
FAQs
If you’re still unsure about how disqualified employment tax levies work or what steps to take, these frequently asked questions can help clarify the process.
How Can a Business Resolve a Disqualified Employment Tax Levy?
A business can resolve a disqualified employment tax levy by working with a qualified tax professional to request a CDP hearing (if eligible), apply for a payment plan, submit an Offer in Compromise, or negotiate other relief options with the IRS. The key is to act quickly and provide all necessary financial documentation.
What Are the Eligibility Requirements for a Payment Plan for a Disqualified Employment Tax Levy?
To qualify for a payment plan, the business must be compliant with current tax filings and demonstrate an ability to pay over time.
How Is the Penalty Calculated for a Disqualified Employment Tax Levy?
There isn’t a unique penalty tied only to a disqualified employment tax levy. Instead, the IRS applies several penalties based on the unpaid employment taxes themselves. If a business fails to deposit payroll taxes on time, it can face a failure-to-deposit penalty of up to 15%. Filing late can add another penalty of up to 25%. On top of that, interest continues to build daily on any outstanding balance.
If the IRS deems an individual responsible under the Trust Fund Recovery Penalty (TFRP), additional personal liability may apply.
