What is the difference between receiving a tax lien vs. levy and how can you resolve the issue?
When the federal government finds that you are owing taxes and sends out a Notice of Deficiency, you have about 90 days to respond. In that time, you are encouraged to negotiate a payment plan with the IRS, or file for an extension (if applicable) to keep the IRS from continuing to apply fees, penalties, and interest on your overdue amount. Alternatively, you may challenge the notice if you find that you have indeed paid all your taxes and believe that the IRS has made an error.
If this notice is ignored, however, the IRS will turn to other methods to convince a taxpayer to pay – specifically liens and levies. These are two different tools that aim to accomplish the same thing: put pressure on the taxpayer to pay their debt.
What is a Tax Lien?
A tax lien is a legal claim by the federal government on your property. Tax liens are made public through a Notice of Federal Tax Lien, informing creditors that your assets and property are now under a lien by the IRS. This means if your property is sold or liquidated, that equity is first used to satisfy your debt with the IRS before the money goes to any other creditor, or yourself.
It does not mean that the IRS can sell your property for you or claim money from your accounts. Liens are not an actual claim on what you own – instead, they’re a declaration that the value of what you own would first be used to clear your debt before you can get a hold of it.
While tax liens are no longer noted on credit reports, they do affect your credit score, even in the long term. This can make seeking financing – for your tax debt or any other purpose – more difficult. Getting a lien cleared up as soon as possible is important, because the next step the IRS will take is a tax levy.
What is a Levy?
What is the difference between a tax lien vs. levy? Where a lien is the IRS effectively telling other creditors that it has first dibs on your property, a levy is when the IRS decides to reach in and take what it needs to satisfy your debt.
There are different types of levies, defined by what property the IRS claims to cover your tax debt. The IRS will usually only resort to a levy if you ignore their lien and make no attempt to negotiate a payment plan for your debt. Once the IRS sends out a Final Notice of Intent to Levy and Notice of Your Right to A Hearing, you have roughly 30 days before the levy itself is enacted.
Levies can typically be split into three types:
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- Bank levies, where the IRS empties a bank account.
- Property levies, where they seize and sell a property at what they find to be a fair market value (you may appeal this valuation).
- Wage levies, where the IRS continuously takes a chunk of your paycheck until your debt is satisfied.
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Unlike other types of wage garnishment, which are limited in scope by state laws, a federal tax wage levy isn’t affected by state laws. The amount withheld from your paycheck will depend on how many dependents you support. Unlike a federal tax lien, levies are not public, and will not affect your credit score.
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- If the IRS claims the contents of an account or sells a property and it isn’t enough to satisfy your debt, they are entitled to another levy.
- If the proceeds from your account or property exceed your total debt, you are entitled to the remainder.
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The IRS must release a levy if you enter into an installment agreement, or if you can convince them that releasing the levy will help you pay your taxes.
Withdrawing or Discharging a Lien
If you can prove that you have either already satisfied your debt with the IRS, or are up-to-date on your tax returns and payments, and have entered into a payment plan with the IRS for the rest of your tax debt, the IRS can withdraw the lien.
If the debt is small enough, simply getting into contact with the IRS and beginning a payment plan could be enough to ask them to withdraw the notice. This does not eliminate your debt but makes it so the IRS is no longer taking precedence over other creditors, which can help you seek financing to cover payments.
Alternatively, you can ask the IRS to discharge a lien on specific property. What this does is let the IRS continue to hold a legal claim on most of your assets and property but discharge a specific property. The IRS will usually agree to do this if you agree to use the proceeds of the sale to cover your tax debt, or if the equity of the rest of your property held in lien is equal to at least twice your total tax debt.
Lien Subordination
Another way to remove a lien, at least partially, is to seek subordination. Where a discharge aims to completely remove the IRS’s lien on a specific property, subordination lets one specified creditor take precedence over the IRS’s lien.
Usually, lien subordination is sought if you’re planning to refinance with a certain property and need a creditor to take precedence over the IRS to get access to said refinancing. The IRS will agree to subordination if you can prove that the loan will help you pay off your tax debt.
Can I Avoid a Lien or Levy?
If you have received a notice of deficiency, the only way to avoid a lien or levy is to pay off your tax debt or get in touch with the IRS and negotiate payment. If your tax debt is substantial, or if you don’t think you can pay it all off even on a monthly basis, you may want to explore alternative options such as a partial payment installment agreement (PPIA), or an offer in compromise (OIC).
How Do I Know What Is Best for Me?
Navigating the IRS and tax liens and levies can be extremely difficult. While the IRS provides many resources for taxpayers, the best way to find a solution is to work with a professional IRS tax attorney or expert. Do you need help with resolving your tax issues? Contact our team today.