Frequently Asked Question: What is the difference between a tax lien and a tax levy?

January 2019 | Article

Dealing with IRS Trouble: A Fresh Start

When tax matters get serious, the IRS will file a tax lien or tax levy against a taxpayer to protect the interest of the IRS. But what does it mean for the taxpayer against whom the liens are filed?

The following insight outlines the difference between a tax lien and a tax levy and what taxpayers should know about them.

What is a Tax Lien?
A tax lien is a document filed in public records by the IRS declaring their right and intention to collect on taxes they believe are owed.

Merriam-Webster defines a lien as a charge upon real or personal property for the satisfaction of some debt or duty ordinarily arising by operation of law. It is further defined as a lender’s claim against a collateral asset that may be legally sold should the borrower fail to repay a loan. The IRS and state tax departments use tax liens to secure unsecured debt, namely delinquent taxes.

Typically, a tax lien is issued when a taxpayer fails to pay taxes after the IRS or a state has made a demand for payment. A tax lien can be filed against individuals, trusts, estates, partnerships, associations, companies, corporations or any other organization that has a tax liability due. Once filed, a lien stays in place until the subject tax liability of the lien is satisfied or becomes unenforceable (usually due to expiration of the statute of limitations). The lien protects the IRS or state and gives them priority over certain third-party creditors, basically putting them at the front of the line to collect.

The legalese on every Notice of Federal Tax Lien declares the lien is “in favor of the United States on all property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.” This means that the IRS has the legal ability to collect what they believe is due in whatever manner they believe will be most effective. This includes agreeable options like formalized installment arrangements, as well as more aggressive means, like a levy.

What is a Tax Levy?
After stating their intent, the IRS uses a tax levy to start collection proceedings on the taxes that they believe are owed.

Merriam-Webster defines a levy as “the imposition or collection of an assessment” and “to impose or collect by legal authority.” A levy allows the IRS to legally seize assets to satisfy a liability. Levies take on several forms, though most people think of a levy in the context of the IRS seizing money from a bank account. Levies include:

  • Garnishment of wage and income
  • Seizing funds from a bank or other financial account
  • Seizing state tax refunds
  • Accounts Receivable Levies (the IRS requests creditors send payments directly to the IRS, instead of to the business)
  • Seizure and sale of real estate, property and equipment

The IRS must provide taxpayers with written notice before they take action on collecting the debt. The most common ways the IRS does this, beyond filing liens, is to send numerous notices, letters, statements and other correspondence through the mail. You may also be assigned and contacted by a revenue officer if your business owes back taxes or if you owe over $250,000 as an individual.

The IRS does not tell a taxpayer when they are going to levy a bank account or when they will be seizing the account or other assets. Instead, they send various letters and notices, such as Notice LT39, Notice CP90, or Notice CP504, indicating their intention to collect after a specified period of time. The notice period for a levy may only be sent out one time. Once the notice period has passed, the IRS is then in control of what can be done as well as the timing.

What do I do if my accounts are levied or my wages are garnished?
The best way to deal with a tax levy is to prevent it from happening in the first place. While it may be tempting to put off dealing with a tax liability, the IRS is not going to stop or delay their collection process.

Assistance is Available
If you receive a tax levy, it’s important to know your rights as a taxpayer:

  • The right to retain representation
  • The right to appeal an IRS decision in an independent forum
  • The right to appeal a federal tax lien through either the collection due process or the collection appeals program

It’s important to note that you will probably need professional assistance in dealing with a tax levy, and there is a very limited window of time for any type of appeal. The appeals process is complex, confusing and time-consuming. While you can appeal a tax lien or levy with the IRS on your own behalf, it is advisable to find qualified tax controversy professional representation to assist you. Our IRS Dispute Resolution and Collections team consists of attorneys, CPAs and enrolled agents, many with previous IRS work experience. The team has over 50 years of combined experience with appeals and has accomplished countless successful resolutions.

Contact your Eide Bailly professional or a member of our IRS Dispute Resolution and Collections team with questions or for a free consultation.

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