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.

If you have tax-related questions in California, 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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