Category: Liens & Levys

Tax debts are some of the hardest debts to deal with. There are several reasons for this, such as special treatment during bankruptcy proceedings and the fact that it’s the government trying to collect the debt.

Tax Levy Versus Tax Lien: What’s the Difference?

Tax Levy Versus Tax Lien: What’s the Difference?

There are several reasons why the IRS is one of the most tenacious debt collectors. One reason is that tax debts are difficult to discharge in bankruptcy proceedings. Another reason relates to the tools the IRS has to collect unpaid taxes. Two of the most prominent are the tax lien and the tax levy, but what’s the difference between the two?

What is a Tax Levy?

A tax levy is one of the scariest tax collection tools in the IRS’s arsenal because it allows the IRS to seize taxpayer property to pay off an outstanding tax balance. Any property that’s subject to an IRS federal tax lien is potentially subject to an IRS tax levy (unless otherwise subject to an exception). This includes assets such as:

  • Bank accounts
  • Real estate
  • Vehicles
  • Income (through wage garnishment)
  • State tax refunds

This sounds pretty scary, and it can be. But understand that while the IRS can theoretically seize a taxpayer’s home or personal vehicle, the IRS rarely does so. This is because it’s a time-consuming and expensive process. In many cases, it’s easier for the IRS to take money from the taxpayer’s bank account or paycheck instead.

There’s also the fact that taking a home and/or vehicle can make it even harder for the taxpayer to pay off their tax debts. It’s hard to earn an income if the taxpayer is homeless or can’t drive to work. It also makes the IRS less likable than it already is.

The legal authority granting the IRS the power to levy property comes from the Internal Revenue Code (IRC) Section 6331. There are generally three conditions that the IRS must meet before the IRS can levy a taxpayer’s property:

  1. The IRS completed a tax assessment and sent the taxpayer a bill for the outstanding tax balance (Notice and Demand for Payment);
  2. The IRS sent the taxpayer a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy. This is often mailed via registered or certified mail, return receipt requested, but is sometimes delivered in person or left at the taxpayer’s home or business address; and
  3. The IRS notified the taxpayer that it may contact third parties regarding the collection or determination of the tax debt.

The IRS can sometimes bypass some of the notice requirements in special situations that warrant a jeopardy levy. The IRS uses a jeopardy levy if it believes the property it wants to seize is in jeopardy of “disappearing” or moved so it’s outside the reach of the IRS.

What is a Tax Lien?

A federal IRS tax lien is not quite as serious as a tax levy, but it can be almost as problematic in some cases. This is because a tax lien is a legal claim against a taxpayer’s property, both existing and future property.

In the colloquial sense, a lien is like the IRS saying they have “dibs” on the taxpayer’s property to prevent it from being sold or seized by other debt collectors until the tax debt is paid first. For the most part, the tax lien applies to all of the taxpayer’s property, from their bank accounts to their home to the furniture and personal property inside their home.

The legal authority granting the IRS the power to place a lien on a taxpayer’s property comes from the IRC Section 6321. There’s generally only one condition that the IRS must meet before the IRS will place a lien on a taxpayer’s property. Specifically, the IRS must first assess a tax against the taxpayer and send them a bill (Notice and Demand for Payment).

In most cases, the IRS will send several notices, asking the taxpayer to pay their tax bill before the IRS places a lien on their property. Assuming the taxpayer hasn’t paid off the tax debt or made arrangements to settle it (with a payment plan or an offer in compromise, for instance), the IRS will file a Notice of Federal Tax Lien.

Once this Notice of Federal Tax Lien gets filed, it’s difficult to transfer or sell property, subject to the lien. It can be done, but the taxpayer will typically need to first remove the tax lien. If a buyer purchases or otherwise obtains property, subject to a tax lien, the IRS can potentially come in and take the property without paying for it, and there’s little the buyer can do about it.

As bad as this sounds, federal tax liens aren’t quite as bad as they used to be. This is because IRS liens don’t affect credit scores or show up in credit histories. Despite this, it can still be difficult to borrow money, as many lenders will want to use the taxpayer’s property as collateral for the loan but will be unable to do so because of the IRS lien (or the creditor’s lien will be subordinate to the IRS’s lien).

In Summary

A tax levy is the physical taking of property to satisfy a tax debt, while a tax lien is creating a legal interest in property to protect the IRS’s ability to collect a tax debt in the future.

 

 

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tax lien and tax levy

What’s the Difference Between a Tax Lien and a Tax Levy?

If a taxpayer has unpaid taxes and doesn’t make arrangements with the IRS to pay that tax balance off over time, then the IRS will initiate the tax collection process. It will begin with letters and notices, asking the taxpayer to pay their tax bill. But, pretty soon, the IRS will send a written warning to the taxpayer that a lien or levy is imminent.

If the IRS files a tax lien against you or levies your property, what does that mean exactly, and should you care which method the IRS uses?

What is an IRS Tax Lien?

When the IRS files a Notice of Federal Tax Lien against you, the IRS is telling the general public that you owe back taxes. This makes it practically impossible to sell or transfer your property unless you first remove the tax lien. This is because no one wants to buy property from you, knowing the IRS may have the legal right to step in and take it from them to pay off your tax debt.

When it comes to your credit history, the tax lien no longer has the negative effect it used to have. Now, IRS tax liens do not show up on your credit report or have an impact on your credit score. That being said, a tax lien can still hurt your credit in that it makes it more difficult (and/or more expensive) to get a loan.

If you’re trying to buy a new car or house by borrowing money, it will be extremely difficult to do so with a tax lien. Not only does a tax lien signal you’re struggling financially, but it also means the creditor likely can’t get a security interest in your property to secure the loan.

For instance, if you wanted a car loan, your lender would probably expect your car to serve as collateral for the loan in case you default. But if there’s a tax lien in place, the car will automatically have a tax lien on it after you buy it (IRS tax liens apply to current and future properties).

This means the car loan lender may not be able to repossess the car from you in case you default on the car loan. The practical consequence is that you either get denied the car loan, or you get it but with a larger down payment and/or a higher interest rate.

What is an IRS Tax Levy?

IRS tax levies can pose a bigger problem than a tax lien. Unlike a tax lien, which is basically a legal warning to others that your property could be used to pay a tax debt, a tax levy is the actual taking of property to satisfy a tax debt. For example, the IRS might levy your bank account and withdraw money from it without your consent, or they might levy your paycheck in the form of a wage garnishment.

Can the IRS File a Lien or Place a Levy on My Car or Home?

Yes, for liens, and almost never for levies. When the IRS files a lien against you, it attaches to not just a specific piece of property, but almost anything you own, including your home and your primary vehicle.

And although the IRS can, theoretically, levy your home or car, it’s very rare for the IRS to do so. There are several reasons for this. First, it’s not worth the trouble, as using a bank levy or paycheck levy (wage garnishment) is almost always a more effective and efficient way to collect back taxes.

Second, the IRS understands that taking away your car or home could hurt your ability to earn income, and they know you need income if you are to pay off a tax debt.

Third, taking your car or home is a bad look for the IRS. The IRS already has a less-than-positive reputation with most people (and members of Congress). A viral story about how they made you go homeless or got you fired because you could no longer get to work is just asking for unnecessary scrutiny and political pressure.

Bottom Line

The IRS trying to collect taxes from you is bad news, regardless of whether the IRS decides to use a lien or levy. However, when it comes to your financial health and daily living, a levy is more likely to cause problems for you in the short term.

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!


Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal.

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How to Remove Tax Liens and Levies?

Tax debts are some of the hardest debts to deal with. There are several reasons for this, such as special treatment during bankruptcy proceedings and the fact that it’s the government trying to collect the debt.

However, another major challenge is that government taxing authorities, such as the Internal Revenue Service (IRS) and the State of California Franchise Tax Board (FTB), can use liens and levies to help collect tax debts.

Continue reading “How to Remove Tax Liens and Levies?”
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Continue reading “How to Stop IRS and California Tax Garnishment?”
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Tax Liens and Levies’ Ins and Outs

After the tax audit, tax liens and levies are some of the most dreaded actions the IRS can take against a taxpayer. One of the reasons they’re so feared is because they’re not very well understood by most people. Well, we’re going to try and change that by shedding some light on these tax collection tools used by the IRS, including how to avoid becoming subject to them.

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Getting Rid of an IRS Lien or Levy

The threat of an audit is a powerful deterrent and does a good job of motivating taxpayers to pay the IRS what they owe. But sometimes this isn’t enough and taxpayers still forego their legal duty to pay their tax obligation. When this happens, the IRS will reach out to the taxpayer to collect an outstanding tax debt. But when asking nicely doesn’t work, the IRS can impose a tax lien and/or a levy.

Continue reading “Getting Rid of an IRS Lien or Levy”