IRS Levy on Your Customers?

Most people assume the IRS only takes money directly from taxpayers, such as through bank levies, wage garnishments, and asset seizures. What many business owners don’t realize is that the IRS can also go after money that other people owe you.

When the IRS issues a third-party levy, it contacts your customers, clients, marketplaces, or payment processors and instructs them to send funds to the IRS instead of to your business. From your customer’s perspective, it’s not optional. They’ve received a legal demand.

That’s why this situation can feel so overwhelming. You’re not only handling the IRS but also caring for anxious customers who really don’t want to be caught in the middle. Remember, you’re doing your best, and that matters.

What a “Third-Party Levy” Really Is

A levy is the IRS’s legal power to seize property or rights to property to collect a tax debt.

In the case of accounts receivable, the “property” is the money your customer owes you. The IRS isn’t waiting for it to reach your account. It’s intercepting it on the way in.

This is commonly done using Form 668-A, which the IRS uses to levy property held by third parties, including bank accounts and business receivables. When that notice lands, your customer is instructed to comply even if they want to keep paying you.

The result is an immediate disruption, where invoices suddenly stop turning into cash. Payments you were expecting may disappear, making cash flow planning feel like guesswork overnight. It can be quite challenging and overwhelming!

Why Receivable Levies Are So Dangerous for Businesses

A bank levy is painful, but it’s usually limited to what’s already there. A receivables levy can be worse because it attacks future cash flow, not just current balances.

Whether your business shows profit on paper or not, a halt in receivables can jeopardize payroll, weaken vendor relationships, and stall growth. Even minor disruptions can lead to more significant operational issues.

There is also a reputational impact, as customers might delay making payments while consulting their legal or accounting teams. Some could quietly withdraw even after the levy is settled.

Unlike bank levies, which require a set holding period before funds are transferred, receivables levies can halt payments as they become due, often without any buffer.

“Didn’t the IRS Have to Warn Us First?”

Before issuing a levy, the IRS generally sends a Final Notice of Intent to Levy and Notice of Your Right to a Hearing, often labeled LT11 or Letter 1058. This notice matters because it’s tied to your appeal rights and your ability to stop enforcement before it begins.

Once the IRS starts issuing levies to third parties, you’re no longer in prevention mode. You’re in damage-control mode.

That doesn’t mean you’re out of options, but timing and strategy become far more important.

What To Do First

The initial step is to verify the specific details of what was sent and to whom. Obtain a copy of the notice your customer received, rather than relying on verbal descriptions. It’s important to determine whether it’s a valid IRS levy, identify the involved tax periods, and find out where the funds are allocated.

Next, identify where the case is in the IRS collection process: Is a Revenue Officer assigned? Was a recent final notice issued? Are missed deadlines affecting leverage? These details determine the next steps.

Handle customer communications with care; remember, customers are not the adversary. They react to legal notices, so maintain a calm and professional tone in your messages, avoiding any pressure that might encourage them to ignore the levy.

How Businesses Actually Stop Receivables Levies

Stopping a receivables levy means moving the IRS toward a resolution path it will accept quickly enough to prevent further damage.

One path is to bring the business into compliance and propose a payment arrangement that the IRS can accept. If returns are missing, especially payroll filings, the IRS will usually refuse to negotiate meaningfully until that’s fixed. Compliance isn’t just a rule; it’s leverage.

Another path involves using appeal rights, if timing allows. If you’re still within the window tied to a final notice, requesting a Collection Due Process (CDP) hearing can pause enforcement and force the case into a structured review. That process creates space to discuss alternatives to levy action.

In other cases, levies are triggered by errors such as misapplied payments, balances that don’t reflect recent credits, wrong entities, or incorrect periods.

Don’t Make It Worse

The most damaging mistake is waiting while trying to “understand” the levy. Every day spent researching instead of acting can mean more diverted payments.

Another common mistake is calling the IRS repeatedly without a plan. Unstructured conversations often lead to inconsistent explanations, new document requests, or accidental admissions that complicate the case.

Some businesses overshare to explain everything, while others ask customers to “hold off” on complying. Both can backfire and harm relationships.

Many owners negotiate against themselves by offering payment figures without analysis, risking unsustainable arrangements or IRS demands for deeper disclosures.

Fast Intervention Matters

If the IRS is levying your receivables, the case has already moved into enforcement. This is no longer about education or future planning; it’s about containing damage and restoring cash flow as quickly as possible.

Our office works with businesses at exactly this stage. We review the levy and notice trail, identify procedural issues with the IRS, communicate directly with the IRS, and pursue the fastest, realistic path to stopping or limiting the levy, whether through compliance cleanup, payment arrangements, appeal strategies, or correcting IRS errors.

If customers are being contacted or payments are being redirected, treat it like a cash-flow emergency. Because that’s exactly what it is.

And in situations like this, the sooner you get help, the more options you usually have. Reach out now to get started resolving your issues!