IRS Tax Lien vs. IRS Tax Levy: What’s the difference?

Taxpayers are often confused about the difference between an IRS tax lien and an IRS tax levy. Both are a part of the collection process when a taxpayer owes money to the IRS, but there are some crucial differences. It’s important to understand the difference between a tax lien and a tax levy in order to protect your rights and your property. Here’s a look at tax liens and tax levies and what you need to know about each.

IRS Tax Lien

A Federal Tax Lien automatically arises when the IRS assesses a tax against a taxpayer and sends a bill, but the taxpayer neglects or refuses to pay it.

The IRS then files a Notice of Federal Tax Lien with the county recorder in the county where you live, own property, or conduct business. The lien does not have to name the property to which it attaches; it automatically encumbers all real estate and personal property in the county. This public document alerts creditors that the government has a legal right to your property, including real estate, financial assets, vehicles, and equipment. It also attaches to all future assets acquired during the duration of the lien.

If credit reporting agencies pick up on the lien, it will be included in your credit report, damaging your credit score and affecting your ability to borrow money, buy a home, or rent an apartment. It could even impact your ability to get a job.

A lien does not take the taxpayer’s property or take away the taxpayer’s right to sell the property. But it does give the IRS first dibs on the sales proceeds. For example, the IRS files a federal tax lien in the county in which the taxpayer owns a residence. The residence is worth $200,000 and has a $100,000 mortgage on the property. The taxpayer has a right to sell the home, but the $100,000 proceeds from the sale ($200,000 sales price less the $100,000 mortgage) will first go to the IRS to be applied against the tax debt before the taxpayer receives any proceeds from the sale.

You can get rid of the lien by paying your debt in full, settling the debt, or waiting until the statute of limitation expires – in most cases, 10 years. Even if you work out a payment arrangement with the IRS, the IRS may still file a federal tax lien.

IRS Tax Levy

An IRS tax levy is different from a lien. A lien protects the government’s interest in your property when you don’t pay a tax debt, but a levy actually takes the property to pay the tax debt. If you do not pay the amount due or make arrangements to settle your debt, the IRS can seize and sell any real estate and business and personal property that you own or have an interest in.

The IRS can levy wages, bank accounts, subcontractor pay, accounts receivable, retirement accounts, homes, cars, and business equipment. However, seizing the taxpayer’s primary residence is rare and the IRS must first get legal approval. As such, seizing a home is usually reserved for only the most egregious cases.

There are a few things that the IRS cannot levy. These exemptions include unemployment benefits, workers compensation, most household goods, and some tools of your trade. Taxpayers commonly assume that if a federal tax lien has not been filed, the IRS cannot seize wages or bank accounts. This is incorrect. The IRS must file a federal tax lien before taking real estate and other property, but they can levy wages, bank accounts, and accounts receivable even if a federal tax lien has not been filed.

IRS levies are not a matter of public record and do not affect your credit report. However, because levies involve seizing assets, they typically cause a lot more problems for taxpayers than liens.

Lien vs. Levy Procedural Requirements

One of the fundamental differences between a lien and a levy involves the procedural requirements. Once the IRS files a federal tax lien, you generally have a 30-day window to file an administrative appeal to request reconsideration of the filing. With a levy, the IRS sends a Final Notice of Intent to Levy. After you receive the notice, you generally have 30 days to file an appeal of the proposed collection action. If you file an appeal, the IRS is prevented from seizing assets until your hearing takes place. The purpose of the hearing is to resolve the debt via an offer in compromise, installment agreement, or have the account placed in Currently Not Collectible Status (aka Financial Hardship).

Note that you have a right to appeal 30 days after a lien is filed and 30 days beforelevy action is taken. Resolving an IRS lien can be difficult because once the lien is filed, the damage is done. For this reason, it’s important to be proactive before the IRS files a Federal Tax Lien.

The IRS only liens or levies assets after several failed attempts to get your attention. Even if you cannot pay your tax bill in full, you should contact a licensed Tax Relief Professional as soon as you receive any sort of collection notice from the IRS for help with creating an effective plan of action before your income and assets are affected. In some cases, the government will allow a payment arrangement or tax settlement without the need for a lien filing.

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