What is the difference between an IRS Tax Levy & IRS Tax Lien

difference between a levy and a lien

It seems that the gentle and kind side of the Internal Revenue Service (IRS) is long gone and now nothing more than far-flung memories. As such, it has put teeth into Circular 230, become extremely aggressive when it comes to targeting taxpayers who didn’t pay their tax liabilities and increased the number of its audits.  

For a more effective approach, the IRS aggressively utilizes the application of tools under its arsenal collections, which are the levies and liens. As a matter of fact, until 2011, the IRS was automatically filing liens when an individual failed to pay their tax on time — specifically when above $5,000 in tax was due. At last, on February 24, 2011, the Internal Revenue Service has become kinder to taxpayers and started a new program known as the “Fresh Start.” 

This program includes changes to automatic lien filings. That said, the enactment of the “Fresh Start” makes the automatic lien filing go from $5,000 to $10,000. Not only that, but the IRS also offered numerous initiatives to eliminate liens and to make other taxpayer-friendly changes. 

However, the IRS also boosts its collection method using levies and liens, as well as their counterparts, which are the transferee, alter ego, and fraudulent conveyance levies and liens. Unluckily, this collection approach lacks Collection Due Process (CDP) rights, which tax lawyers or tax specialists and their clients have come to depend on.  

To have a better understanding of the IRS tax levies and liens, read on and discover the essential things related to these tax collection efforts.    

What is a Federal Tax Lien?

When you neglect or fail to pay your tax debt, the U.S government will have legal rights to claim or take your personal property, which is called a federal tax lien. As such, if you have unpaid federal taxes, the IRS will send you a “Notice of Federal Tax Lien,” which will serve as a demand for payment.  

Furthermore, any assets under your possession can be placed on this tax lien. There are temporary ways to address a federal tax lien, these includes:

  • Discharging of property
  • Filing for withdrawal
  • Subordination agreements. 

On top of that, paying your unpaid taxes in full will be the best way to get rid of tax liens. After you have paid your tax debt, the IRS will release your lien within 30 days. 

How Does a Lien Affect You?

A federal tax lien will only exist once the Internal Revenue Service assessed the unpaid taxes of taxpayers. After the assessment, the IRS will send a bill that states how much the taxpayer owes. If you have received a notice of Federal Tax Lien, here’s how it can affect you: 

  1. Assets. A lien can be attached to all your assets, such as securities, properties, vehicles, and future assets obtained during the entire duration of the lien. 
  2. Credit. When the IRS filed a Notice of Federal Tax Lien against you, it may limit your ability to get credit. 
  3. Business. A lien can be attached to all your business property and the rights to business property, including the receivable accounts. 
  4. Bankruptcy. If you have decided to file for bankruptcy, your lien, tax debt, and Notice of Federal Lien may continue after the bankruptcy

Besides all that, the IRS can also revoke or deny your passport for unpaid tax debt.

What is a Federal Tax Levy?

A tax levy grants the right to the creditor to seize property under the debtor’s possession to satisfy his or her tax debt. When compared to a federal tax lien, a levy is a more aggressive approach to collect debt since the creditor has a legal claim to take and sell the property subject to the levy.  

Moreover, a levy can be attached to real property — may it be tangible and intangible personal property. Examples of intangible personal property are wages, bank accounts, and accounts receivable. Some examples of tangible personal property include safety deposit boxes, vehicles, equipment, and inventory. 

Furthermore, levies are not a matter of public record. As such, it will not affect your credit report. However, since IRS levies involve taking and selling assets, they usually create more serious problems for taxpayers than liens. Thus, it is essential to pay your tax liabilities on time to save yourself from both lien and levies.

How Does a Levy Affect You?

To determine how a levy affects you, you must know the size of your debt. Hence, to prepare yourself for the impact of a tax levy, you must know how much do you really owe the Internal Revenue Service. However, regardless of the amount, the IRS will often go for the easiest approach to collect your debt through a levy. These includes:

  • Property seizure. The IRS may seize your property such as personal properties, real estate, or the cash on your bank account.  
  • IRS bank levy. It is when IRS requests the bank to freeze your accounts for 21 days to facilitate recovery of their debt. With this, you may suffer an emptied account. yet you still have a balance to pay. 
  • 1099 levy. It is a tax levy on the receivables you currently owe. 
difference between a levy and a lien

How to Get Off a Lien?

If you want to get off a lien from your assets, you should pay your tax debt in full. Once these unpaid taxes are paid off, the IRS will release your lien within 30 days after you have made the payment. Moreover, when conditions are in the best interest of both taxpayer and the government, other options to lower the impact of liens will exist. 

Besides satisfying your tax debt, here are some options you have to remove a lien from your property:

  • Obtain a court order removing the lien.
  • File for Chapter 7 Bankruptcy.
  • Negotiate with the creditor privately. 
  • Wait for the Statute of Limitations to run out.

How to Get a Levy Released

If the IRS has taken your property through the tax levy, you can apply to release the levy. There are various reasons the IRS would agree to release a levy and give your property back. Here are some of them:

  • The levy is causing economic hardship.
  • You have already paid your debt. 
  • The release of the levy will help you pay off your tax debt. 
  • The legal collection period ended before the levy has been issued.
  • The value of the property that was taken is higher than the tax liability and releasing the levy won’t prevent the IRS to collect your taxes. 
  • You agree to have an installment payment agreement. 

Ultimately, if you want to get a tax levy lifted from your property, seeking legal advice from a tax professional is always a wise step. You may talk to them about your tax issues and get the assistance you need to know how to get a tax levy released. 

FAQ

What is worse a levy or lien?

Tax levies and liens are both serious tax problems but the levy is a more aggressive approach to collect your debts. While a lien is a legal claim against your property to secure payment of your unpaid taxes, a levy actually seize the property and may put it on sale to satisfy the tax debt. 

Does the IRS have to notify you of a levy?

If you have unpaid tax liabilities, you will receive a demand for payment from the IRS and will get a Notice of Federal Tax Lien. If your debt will remain unpaid and seems you have neglected the lien, a Notice of intent to Levy and Notice of your Right to a Hearing will be issued. 

Which comes first lien or levy?

A lien comes before a levy. On top of that, dealing with a levy is much difficult than getting off a lien because the levy is an actual seizure of property and assets. If you neglect or fail to pay your tax debt after a lien has been issued, the IRS will send you a Notice of Intent to Levy. 

Do liens show up on credit reports?

No. Federal tax liens don’t appear on credit reports but they will show up on your public record. It means that if a lender checks your public record during the evaluation of the loan, it will still affect the overall percentage of your approval. Thus, it might be pretty difficult to get a new loan if you have a property lien. 

How do I know if I have a tax lien or levy?

If you have unpaid tax liabilities, the Internal Revenue Service will send you a demand for payment and mails the Notice of Federal Tax Lien after the lien has been filed. If you neglect or fail to pay your debt, the IRS will then send you a Notice of Intent to Levy and Notice of Your Right to a Hearing. 

Conclusion

Tax levies and liens are both serious tax issues, but they don’t happen unexpectedly. The Internal Revenue Service will also give you a warning before the issuance of a levy and lien. But to save yourself from these tax problems, you should always pay your tax liabilities on time. Getting off a lien and releasing of levy might be a complex process. Thus, preventing these tax issues to arise is better than seeking a way to get them lifted.

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