Jan 4, 2008

Tax Debt of an LLC as Sole Proprietorship and the IRS Levy Process

I commonly receive a question on whether the IRS can levy an individual for the liabilities of the single-member limited liability company or "LLC." This answer is complicated as it depends on how the IRS treats the LLC.

If the LLC is single member, how is the LLC treated or tax purposes? If no special election was made (i.e. Form 8832- Election of Entity Classification or Form 2553- S Corporation election), the IRS will treat the LLC appropriately as an individual sole-proprietorship for tax purposes. Hence, this person will file the LLC as a Schedule C (Sole Proprietorship Business) with their Form 1040 annually. The IRS will treat this liability as an individual liability for all payroll and income taxes. This means that the IRS must collect on the individual for all liabilities. For payroll taxes, no separate assessment is needed for civil trust fund taxes.

So how can the IRS collect on LLC payroll and income tax liabilities when the LLC is treated as a sole proprietorship?? The answer is by a careful levy. According the IRS Internal Revenue Manual, the IRS can levy both the LLC (under its EIN) and the individual (under their SSN) for the liability. To quote the IRM:

When notice of levy is issued to collect liabilities assessed in the name and TIN of a disregarded entity, special care is needed. To avoid accounts being incorrectly attached and to facilitate the posting of levy proceeds received, a disclaimer may be added to the notice of levy: " This notice attaches to all accounts in the name of (single member owner name and EIN) as owner of (name of disregarded LLC and EIN) but does not attach accounts established in the name of (name of disregarded LLC and EIN)" .

Hence, the LLC is not a manner to avoid taxes. The IRS has got you covered on this angle. If you have a Revenue Officer, they will understand this rule and not make an error in levy.

If you have questions related to LLC, tax debt, and IRS collections (especially levies), then contact an experienced tax professional. If a levy is present, the only manner to release it is to get into an agreement with the IRS.

1 responses:

tax debt January 16, 2009 at 7:18 AM  

Hi, This is my 1st visit to your blog.Thank you for this advice That was very interesting and informative.Keep up the good work.

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