If you are a delinquent taxpayer, the IRS can file both a tax lien and a tax levy against your property to recover your outstanding tax debt. If you are facing an IRS collection due to back taxes, it’s important to understand the difference between a tax lien and a tax levy and how each affects you.
What Is a Tax Lien?
A tax lien is the IRS legal claim placed against the property of a delinquent taxpayer to secure the payment of tax debt. It works similarly to loan collateral as it serves as a protection for the tax amount you owe. Notably, a tax lien can be placed against financial assets, real estate, or personal property. Once the IRS has placed a tax lien on your property, you are legally prohibited from selling the property.
What Is a Tax Levy?
A tax levy allows the IRS to legally seize your property to pay off your tax debt. A tax levy process is like a seizure or garnishment and is filed against a delinquent taxpayer’s retirement accounts, bank accounts, subcontract pay, wages and accounts receivables. The IRS can also use a levy to legally seize a delinquent taxpayer’s business equipment, property, or vehicles to repay the tax debt.
How are a Tax Lien and a Tax Levy Different?
A tax lien and tax levy are different from each other. A lien is the IRS claim against a property to collect payment of your tax debt, such as labeling a property as collateral. On the other hand, a tax levy is an actual attempt to seize that property.
Does a Tax Lien Come Before a Tax Levy?
A tax lien typically comes before a tax levy. Once you receive the tax lien, it is best to immediately resolve your IRS tax issues to avoid a tax levy.
How Will a Tax lien Affect Me?
There are several ways that a tax lien affects you. It impacts all areas of your life, including your assets, business, credit and bankruptcy proceedings:
- Assets: A lien will attach to all your assets, including property, money in accounts, retirement benefits and more.
- Credit: A notice of lien might change your credit rating as the records can be reported to credit bureaus. This means it may become difficult for you to obtain additional credit going forward.
- Business: A tax lien asserts the government’s stake in your business property and accounts receivables.
How Will a Tax Levy Affect Me?
How a tax levy will impact you is mostly determined by the size of your tax debt. The IRS typically prefers the easiest method of tax collection, depending on how much tax you owe. A tax levy can result in:
- Seizure of property, including business equipment, property or vehicles.
- 1099 levy on receivables you are currently owed (but not for future ones).
- Freezing of your bank account for 21 days to enable the IRS to recover your tax debt.
How Can I Stop or Avoid a Tax Lien?
The ideal way to avoid a tax lien is to pay all your outstanding tax debts in full, including the penalties, fees and interest. The IRS releases your tax lien within 30 days after you clear your tax debt. In addition to submitting an Offer in Compromise or setting up an IRS payment plan, alternatives to eliminate a tax lien include:
- Discharge of property: A discharge removes the lien from a property. This enables you to sell it or take a loan against the property to pay off your tax debt
- Subordination: Subordination enables creditors to receive payment before the IRS. Subordination can help you obtain a loan to pay off your remaining tax debt.
How Can I Stop or Avoid a Tax Levy?
Similarly, you must pay your tax debt to remove a levy from your property. However, if you are not able to pay the full amount, including penalties and interests, consider appealing both the levy and lien. If you are considering an appeal, do so within 30 days from the date indicated in your Notice of Federal Tax Lien. You can also seek tax relief to settle your tax debt with an Offer in Compromise or an IRS monthly installment agreement.
There is no doubt IRS levies and liens can be scary and getting out of them can be challenging. However, an experienced tax professional can help you get a levy lifted. Importantly, the IRS won’t seize your assets within the first 30 days after issuing the Final Notice of Intent to Levy. The 30-day window provides you opportunities to determine the best method of resolving your tax issues with the IRS, like appealing, requesting Collection Due Process (CDP), submitting an Offer in Compromise, and more.
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