What Is a Disqualified Employment Tax Levy?

A disqualified employment tax levy is a collection tool used by the Internal Revenue Service (IRS) for unpaid business payroll taxes. It represents a stage where a business owner has forfeited the right to dispute the amount of tax the IRS claims is owed. This levy allows the IRS to seize assets more quickly than usual to prevent businesses from accumulating further unpaid tax liabilities, a practice known as “pyramiding.”

When a business faces this action, the IRS can garnish bank accounts, seize accounts receivable, or take other property without the standard pre-levy waiting period. The “disqualified” label indicates the business had a prior opportunity to contest an employment tax debt but failed to do so, and has since incurred new employment tax debts.

The Path to a Disqualified Levy

The process leading to a disqualified employment tax levy begins with managing payroll taxes. Employers must withhold federal income taxes, Social Security, and Medicare taxes from employee wages. These funds are held in trust for the government and must be reported on Form 941, Employer’s QUARTERLY Federal Tax Return, and deposited on a set schedule.

If a business fails to remit these trust funds, the IRS can pursue individuals it deems responsible for the financial decisions through the Trust Fund Recovery Penalty (TFRP). This makes those individuals personally liable for the unpaid trust fund portion of the taxes. The TFRP is a mechanism to collect the withheld taxes from the personal assets of individuals who had significant control over the business’s finances and willfully failed to pay the taxes.

Before a levy is issued, the business and responsible individuals receive several IRS notices. The Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, provides a 30-day window to request a Collection Due Process (CDP) hearing. Failing to use this opportunity to dispute the tax debt sets the stage for a future levy to be classified as disqualified.

A levy becomes a Disqualified Employment Tax Levy (DETL) when the business has requested a CDP hearing for an employment tax liability and then incurs another employment tax debt within the two-year period following the original dispute. The IRS is not required to send another pre-levy notice for the new debt. This provision allows the agency to move directly to the seizure of assets to prevent the compounding of unpaid taxes.

Understanding the “Disqualified” Limitation

A Collection Due Process (CDP) hearing, requested using Form 12153, is a taxpayer’s primary opportunity to formally contest an IRS collection action before an impartial officer from the IRS Independent Office of Appeals. When a levy is “disqualified,” the taxpayer is barred from one of the functions of a CDP hearing: challenging the existence or the amount of the underlying tax debt. This limitation exists because the taxpayer is presumed to have had a prior chance to dispute the tax.

By not taking that earlier opportunity, the right to argue the tax amount in a future CDP hearing is forfeited. However, a taxpayer subject to a disqualified levy can still request a post-levy CDP hearing. At this hearing, they can argue that the levy is improper due to economic hardship or that the IRS failed to follow proper procedure.

The taxpayer can also propose collection alternatives, such as a payment plan or a settlement offer. The focus of the hearing shifts from the validity of the debt to the feasibility of these solutions.

Information Required for a Resolution

To negotiate a collection alternative, a taxpayer must provide the IRS with detailed financial documentation. The IRS will not consider proposals without a complete and verified picture of the taxpayer’s financial situation. The data on these forms informs the IRS’s decision and determines a taxpayer’s reasonable collection potential, which dictates whether a proposed payment plan or settlement offer is acceptable.

For the Business

For a business entity, the required information is consolidated on Form 433-B, Collection Information Statement for Businesses. This includes all IRS correspondence, copies of filed employment tax returns, and financial statements like profit and loss statements and balance sheets. A comprehensive list of all business assets must also be compiled, including:

• Current market value
• Any associated loans
• Recent bank statements
• Recent investment account statements

For Individuals

If the Trust Fund Recovery Penalty has been assessed, making individuals personally liable, they must provide their own financial details using Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. This form requires a detailed breakdown of personal finances, including all sources of income and a budget of monthly living expenses. A full accounting of personal assets is also required, including:

• Bank accounts
• Real estate
• Vehicles
• Retirement accounts

Pursuing Collection Alternatives

Installment Agreement

An Installment Agreement (IA) allows for monthly payments of the tax debt over time. The request can be made using the IRS’s Online Payment Agreement tool or by filing Form 9465, Installment Agreement Request. The form requires a proposed monthly payment amount and bank account information for direct debit payments, which may reduce the setup fee.

Offer in Compromise

An Offer in Compromise (OIC) is a request to settle the tax debt for less than the full amount owed. The process requires submitting Form 656, Offer in Compromise, along with the appropriate Collection Information Statement (Form 433-A or 433-B). A non-refundable application fee and an initial payment are required with the submission, unless the taxpayer qualifies for a low-income exception.

Currently Not Collectible Status

Taxpayers with severe economic hardship can request Currently Not Collectible (CNC) status, which temporarily suspends collection efforts. To request CNC status, the taxpayer must contact the IRS and provide a completed Form 433-A or 433-B as proof of their financial situation. The IRS analyzes this form to verify that allowable expenses exceed income. If approved, the IRS stops collection actions, but penalties and interest continue to accrue on the debt.