Having an IRS tax lien or levy imposed is one of the scariest situations a taxpayer can encounter. This fear is completely understandable given the immense power of the IRS. The good news is that the IRS won’t impose a tax lien or levy without first exhausting other collection methods. This means a taxpayer will usually have plenty of notice before things get so bad that the IRS will enact a tax lien or. However, if you are unfortunate enough to be subject to a tax lien or levy, below is some basic information about IRS tax liens and levies that may help figure out what to do next.
What Is an IRS Tax Lien?
A tax lien is a legal claim the IRS places on a taxpayer’s property as a result of an unpaid tax debt. This legal claim will attach to basically all of the taxpayer’s present and future acquired property, including bank accounts, real estate and personal belongings.
This legal claim, also called a security interest, can create problems for the taxpayer. First, it can severely damage the taxpayer’s credit since any credit checks will reveal the tax lien and make it very difficult to obtain credit, such as a mortgage or personal loan.
Second, the tax lien will effectively make the taxpayer’s property the IRS’ property. This means if the taxpayer sells something that has an IRS tax lien on it, the cash proceeds belong to the IRS, not the taxpayer. This situation will exist until the tax delinquency is resolved.
What Is an IRS Tax Levy?
A tax lien is considered to be more “serious” than a lien. This is because the tax levy will result in the IRS taking the property, not just having a legal claim to it. The IRS will take the taxpayer’s property then use it to satisfy the unpaid tax debt.
A tax levy can occur in several ways. First, the IRS can physically possess the property, then sell it and keep the proceeds (assuming the proceeds from the sale are not in excess of the tax debt). Second, the IRS can withdraw money from the taxpayer’s bank account. Third, the IRS can take a percentage of the taxpayer’s income. This is referred to as wage garnishment.
How Can I Avoid a Tax Lien or Levy?
The best thing a taxpayer can do is to pay all the taxes they are legally required to pay. Only when the taxpayer fails to pay his or her legal tax bill, will the potential for a tax lien or levy arise. Assuming a taxpayer gets behind on his or her tax obligations, the IRS will send a series of written notices explaining the taxpayer’s tax debt and how to fix it.
The last thing a taxpayer should do is ignore the tax notices from the IRS. It’s when the IRS isn’t getting anywhere with recovering the outstanding tax bill will they take steps to impose a tax lien or levy against the taxpayer.
So even if the taxpayer cannot quickly settle his or her tax debt, they should respond to the IRS collection notices and arrange a way to pay off the tax debt. The IRS may agree to set up a payment plan or settle the tax debt for an amount lower than the full amount owed. There may also be other options, but it’s strongly recommended the taxpayer consult with a tax legal professional to discuss what they are and to decide which option is best.