Federal Tax Liens and Levies: Understanding the Difference

The IRS has authority to take certain actions to recover unpaid taxes from individuals and businesses, provided it has given sufficient notice. Some confusion exists over the difference between two tactics that the IRS may use: a federal tax lien and a federal tax levy. The key difference is that a levy involves an actual seizure of property, while a lien is merely a claim on property because of an unpaid debt. The IRS must provide taxpayers with notice before levying property or filing a lien. In either case, the taxpayer may request a hearing to dispute the IRS’s determination.

Federal Tax Liens

A “lien” is an interest in property by someone who does not have the right to possess that property. Mortgage liens are a common example. When a person takes out a mortgage to buy real property, the mortgage lender typically has a lien on that property until the mortgage loan is paid in full. The document creating the lien is filed in the public record and serves as notice that the mortgage lender has a claim on the property. If the owner defaults on the loan, the lienholder can recover the debt through foreclosure. If the owner sells the property without paying off the loan, the lien remains attached to the property, along with the right to foreclose.

A federal tax lien is not attached to a single piece of property. It attaches to any property owned by the taxpayer, including a home or other real estate. A tax lien also covers automobiles, securities and other financial assets, and personal property. Tax liens often have priority over other liens, meaning that it gets paid before other debts.

In order to file a tax lien, the IRS must send the taxpayer a notice and demand for payment of unpaid tax. If the taxpayer does not pay in time, it must then file a Notice of Federal Tax Lien. This document gives notice to other creditors that the IRS is claiming a lien. The IRS will file the notice with the state or county where the taxpayer resides, and it may notify the credit reporting agencies.

The most direct way to clear a tax lien is to pay the amount of tax owed. A taxpayer may request discharge of specific assets from a tax lien on several grounds, such as that the value of the remainder of the taxpayer’s assets is two or more times greater than the tax bill.

Federal Tax Levies

A “levy” is the actual seizure of property to satisfy a debt. After sending a notice and demand for payment, the IRS may issue a CP504 Notice, which requires the taxpayer to pay the outstanding amount immediately. The final step before carrying out a levy is to send an LT11 Notice or Letter 1058.

The IRS can attach a levy to a taxpayer’s bank accounts, or it can garnish wages to recover the amount owed. It can also seize personal property, vehicles, real estate, or Social Security benefits.

Avoid These Crippling Sanctions

While the difference between tax liens and levies is important, as one means you get to keep your property and the other means you do not, one thing having tax liens and levies explained should do for anyone who learns about this is motivate them to avoid these situations. Each of them is nothing short of crippling for a taxpayer who has to deal with these problems. A person’s or business’ finances can be all but destroyed if these situations arise.

For instance, if you have your business operating account levied, that means that the IRS can seize any and all deposits into that account and freeze it until the tax debt is paid. That makes it awfully difficult to run a business or pay monthly family bills if your personal account is levied. A lien may be less severe, but if one is in place it means that you cannot sell your home or car or whatever asset to which that lien is attached until that lien is removed. 

Fortunately, there is a way for you to avoid having to learn the difference between tax liens and levies the hard way, and that’s by making sure you have tax professionals working for you who understand your situation, the process of dealing with the IRS and the steps needed to effectuate a resolution to these problems. While it may not seem like it if you’re going through this because you’re stressed about the situation, it is possible to work with the IRS and to resolve tax problems efficiently. You simply need to make that first step towards doing so, which is contacting us for help.

If you have tax-related questions, the Enterprise Consultants Group’s tax advisors are available to assist you. Please contact us online or at (800) 575-9284 today to discuss your case.

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