If the IRS believes a taxpayer owes a tax debt, the IRS will begin a series of steps to collect the unpaid taxes. The process will begin with notifying the taxpayer and working with them to get the taxes paid. However, if the taxpayer ignores the request or refuses to pay, the IRS has two very powerful tools for collecting the taxes, both of which are the subject of this blog post.
Tax Liens and Levies: What Are They?
A lien and levy are two different things. A tax lien is a security interest the IRS attaches to all of a taxpayer’s property in order to protect the ability to recover the tax debt. Not only does the tax lien attach to all of the taxpayer’s property at the time the lien is imposed, but also to any future property acquired by the taxpayer.
A tax levy is the actual taking of property, where property is seized by the IRS in order to help pay for an outstanding tax debt. Unlike a tax lien, a tax levy allows the IRS to not just “claim” property, but actually take it. This can be done in several ways, such as wage garnishment, withdrawal of money from the taxpayer’s bank account and the seizure and sale of physical assets. Despite its power, as long as the required tax procedures are followed, the IRS does not have to go to court to get a tax levy.
How Does a Tax Lien or Levy Occur?
A tax lien will usually be preceded by two steps. First, the IRS will notify the taxpayer of the unpaid tax debt. Second, the taxpayer will fail to fully pay the tax debt. When a tax lien is placed on property, it ordinarily will not come as a surprise to the taxpayer.
A tax levy will usually occur only after a tax lien has been placed on a taxpayer’s property. Once the lien is imposed and the taxpayer still has not paid the tax debt, the IRS will send several notices warning of a tax levy and provide an opportunity for the taxpayer to contest the tax levy at a hearing. If the tax debt is not paid, the IRS will issue the levy.
How Can a Tax Lien or Levy Be Removed?
A tax lien can be removed or dealt with in several ways:
- Payment of the outstanding tax debt.
- Obtain a Certificate of Discharge.
- Subordinate the IRS lien such that other creditors will have a higher priority. This can make getting a loan much easier since it allows non-IRS creditors to gain access to property to secure a debt.
- Obtain a Lien Notice Withdrawal.
A tax levy can be removed when the taxpayer does any of the following:
- Pays the outstanding debt.
- Demonstrates extreme financial hardship imposed by the levy.
- Shows that the levy’s release will make it easier for the taxpayer to pay his or her taxes.
- Enters into an Installment Agreement with the IRS which requires the IRS to remove the levy.
- Shows that the property levied upon is worth more than the tax debt and the levy’s release will not jeopardize the IRS’ ability to collect the unpaid taxes.
In Summary
This blog is just a basic overview of the tax lien and levy process. Should a taxpayer have a tax lien or levy imposed, or receive notice of a potential tax lien or levy, it is highly advisable to seek professional help, such as the services of a tax attorney.