Imagine getting a call from your biggest customer. The customer tells you the IRS contacted them about money your business owes in taxes. Now you are worried about losing the customer, missing payroll, and keeping your business open.

Yes, the IRS can contact customers in certain circumstances and can sometimes levy payments owed to your business. But different rules apply to information requests and actual levies. You may have legal protections and options if you act quickly.

At Tomes Law Firm, our attorneys and tax professionals look at both the tax problem and the threat to your business. Here is what New Jersey business owners should know.

Why would the IRS contact my customers or clients?

The IRS may be trying to confirm your income, locate business assets, identify accounts receivable, or collect past-due taxes. An inquiry might ask for information. An IRS levy is different: it may legally require a customer to send the IRS money that otherwise would have been paid to you.

Can the IRS contact my customers without giving me 45 days’ notice?

For many IRS third-party information contacts, Internal Revenue Code section 7602(c) generally requires the IRS to send a notice at least 45 days before the period in which it intends to contact third parties. That contact period cannot exceed one year. There are exceptions. The IRS generally does not have to tell you separately before contacting each particular customer.

You may request a record of certain third parties the IRS contacted. The rules for a levy also involve assessment, demand, and levy-notice requirements, with exceptions. A warning issued earlier may still be effective; the IRS generally does not have to restart the collection notice process merely because time has passed.

The 45-day third-party notice should not be confused with the separate notice and appeal rules that apply to levies. The facts and type of contact matter.

What is the difference between a third-party contact and a customer levy?

A third-party contact may be an inquiry seeking information. A levy is the IRS taking property or rights to property to collect a tax debt. A customer served with a valid levy generally has a legal obligation to follow it. Do not tell a customer to ignore a levy.

Can the IRS take payments my customers owe me?

Yes, if you have an existing right to payment that the levy reaches. For example, suppose a construction company has completed a $40,000 job and is waiting for the customer to pay its invoice. A properly served IRS levy may require that customer to pay the IRS instead of the company. The business could then struggle to cover payroll, materials, or rent.

Whether a levy reaches a particular payment depends on the underlying contract, when the right to payment arose, and the terms of the levy. If the business has assigned or pledged receivables to a lender or factor, ownership and lien-priority questions may also matter. Do not assume that a lender’s lien automatically defeats the IRS levy or that the IRS owns all future receipts.

If the IRS levies one payment, can it take every future payment?

Not necessarily. An ordinary levy generally reaches property and rights to property existing when it is served. A payment due later may still be reached if an enforceable, fixed right to payment already existed. A new payment obligation created by later work may require a new levy. A lawyer should review the customer agreement and the levy itself.

A real client story: Harry lost his largest customer

Harry had unpaid tax debt. The IRS levied payments owed to him by a customer. When that customer learned about the tax debt through the levy, Harry lost his largest client.

For Harry, the damage went beyond the money being taken. Losing a major customer meant losing an important business relationship and the income it could have generated in the future. His experience shows why business owners should not wait until the IRS contacts their customers to seek help.

Will an IRS contact damage my business reputation?

It can. A customer may become concerned about whether your business is financially stable or able to complete the next job. Even when a tax debt can ultimately be resolved, a lost business relationship may be difficult to repair. This is why early intervention matters.

Can I stop the IRS from contacting my customers?

Sometimes, but there is no blanket right to block every lawful IRS contact. A tax attorney can examine whether the proper notice was sent, whether the contact is authorized, and whether the tax account can be addressed before more customers are involved. Depending on the case, counsel may seek to resolve the balance, challenge an improper action, request levy release, or negotiate a collection alternative.

Can I get a customer levy released if it threatens my business?

A levy may be released when required by law, including where release would facilitate collection of the tax, an appropriate payment arrangement applies, the collection period expired before the levy, or other statutory grounds are met. A business may be able to show that releasing receivables would help it stay operating and pay the IRS.

However, the special economic-hardship rule based on inability to meet basic living expenses applies to individuals, not automatically to corporations. A business cannot assume that an IRS levy must be released just because it needs the money for payroll or rent. A levy release also does not erase the tax debt.

Should I call my customers before the IRS does?

Sometimes a thoughtful customer communication is appropriate, but do not rush to send a message that could confuse customers or make the situation worse. First confirm what IRS action is threatened or has occurred and discuss the approach with counsel. Never ask a customer to hide information or disregard a valid levy. If a customer has already been served, the communication should be accurate, calm, and consistent with the customer’s legal obligations.

What if my customer tells me the IRS already called or sent a levy?

Ask for a copy of the notice, summons, or levy and note when the customer received it. Review your IRS notices and account status promptly. Confirm whether the customer received only an information request or a legal demand to pay the IRS. If a levy was served, have your attorney review its scope and possible release or appeal options immediately.

How can Tomes Law Firm help protect my business?

At Tomes Law Firm, we know that a business tax problem does not end with the amount owed to the IRS. Owners are also thinking about employees, suppliers, customer relationships, and the reputation they spent years building.

Our attorneys and tax professionals examine what the IRS may lawfully do, review the amount owed and collection deadlines, and address urgent collection threats while working toward a resolution. Our goal is not simply to resolve a tax debt. It is to help protect the business while we work toward that resolution.

Frequently asked questions

Can the IRS tell my customers how much I owe?

The IRS must follow confidentiality rules, but information needed to carry out a lawful levy may reveal that you have a tax collection problem.

Can the IRS levy business accounts receivable?

Yes. Some existing rights to receive customer payments can be levied. The details depend on the agreements, timing, and competing rights, if any.

Does my customer have to comply with an IRS levy?

Generally, a customer served with a valid levy must comply with its legal obligations. The customer should seek advice if the levy appears incorrect or raises competing ownership claims.

Will a payment plan automatically stop a levy on my customers?

No. A proposed plan does not automatically lift an existing levy. The status and terms of an accepted agreement and any written levy release matter.

What should I do next?

Gather all IRS notices, customer correspondence, unpaid invoices, contracts, and any information about loans secured by receivables. Do not wait for a major customer to be contacted. Contact Tomes Law Firm, PC, in Freehold, New Jersey, for a review of your specific situation. Call us for a confidential consultation at 732-333-0681 or 833-4IRS-TAX

This article provides general information and is not legal advice for a particular case.

Official sources

IRS Third Party Contact Program: https://www.irs.gov/irm/part25/irm_25-027-001

IRS: Levy: https://www.irs.gov/businesses/small-businesses-self-employed/levy

IRS: How Do I Get a Levy Released?: https://www.irs.gov/businesses/small-businesses-self-employed/how-do-i-get-a-levy-released

IRS: Levies on Property in the Hands of Third Parties: https://www.irs.gov/irm/part5/irm_05-011-005

Internal Revenue Code section 7602: https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section7602&num=0&edition=prelim