The IRS uses Notice CP138 to inform you that they are taking your refund & applying it to another tax period with tax due. These actions should be pursued through the IRS administrative process. You have 60 days to correct or Appeal this decision.
Otherwise, the business will have to pay the tax and seek a Claim for Refund. It may ultimately be decided in US District Court.
Respond to Notice CP138
Essentially, you should investigate the prior tax period to see if you agree you owe. You'll have to order the business Account Transcripts for All time periods to compare with your records. You may have to prepare an amended return if errors are found (Here, Form 941-X).
TaxHelpLaw has Prep Steps for Return Errors & Prep Steps for Business Taxes to follow for further answers to your questions!
Various Types of IRS Notice CP138:
