Having a tax issue is always a stressful and unpleasant time, especially when the IRS starts taking action to collect unpaid debts. If you owe back taxes, you may have heard terms like “tax lien” and “tax levy.” While they might sound similar, they serve different purposes and have distinct consequences for taxpayers.
Understanding how each works and what they mean for your financial future will help you devise the right course of action. Get legal counsel if you are dealing with a tax lien, tax levy, or any other tax matter.
At Wiggam Law, we know that ignoring the IRS problem will not solve it. We strive to provide tailored solutions that meet each client’s specific needs.
What Is a Tax Lien?
A tax lien is a legal claim placed on a taxpayer’s property due to failure to pay taxes. It acts as a safeguard for the government, ensuring it has the right to collect the debt owed. The lien applies to all taxpayer property, including real estate, personal property, and financial assets.
The main purpose of a tax lien is to protect the government’s interest in a taxpayer’s property. It serves as a formal notice that the IRS intends to claim a portion of the property value if the debt remains unpaid. This claim can attach to both current property and future assets, making it difficult for taxpayers to access their equity.
What to expect if the IRS issues a tax lien
When a taxpayer fails to pay their taxes, the IRS may file a Notice of Federal Tax Lien. This document is a public record that informs creditors of the government’s legal claim. A lien can make it nearly impossible to sell or refinance property without first settling the debt. For example, if you try to sell your home, the lien must be paid off out of the proceeds of the sale. If you give an asset away, the lien will stay attached to the title.
The IRS doesn’t issue a lien without warning. Before taking this step, it sends a Notice and Demand for Payment outlining the taxes owed. If the taxpayer fails to pay after receiving this notice, the IRS moves forward with filing the lien.
What Is a Tax Levy?
A tax levy is the legal seizure of a taxpayer’s property to settle unpaid tax debt. Unlike a lien, which is a claim on property, a levy involves taking property directly to satisfy the debt. The IRS can levy various types of assets, including wages, bank accounts, business assets, and even physical property like cars or homes.
The primary purpose of a tax levy is to allow the IRS to collect unpaid taxes by directly accessing a taxpayer’s assets. It is one of the most aggressive tools the IRS uses to recover tax debt. Once in effect, a levy bypasses the taxpayer’s ability to negotiate or voluntarily pay, ensuring the IRS collects the money owed.
What to expect if the IRS levies your assets
The IRS issues a levy only after multiple attempts to resolve the tax debt. Before taking this step, the IRS sends a Final Notice of Intent to Levy (such as LT1058) and gives the taxpayer 30 days to pay the tax, appeal the levy, or make other arrangements. If the taxpayer ignores these notices or fails to make arrangements to pay, the IRS proceeds with the levy.
Depending on the type of levy, the IRS may start a wage garnishment, freeze the funds in your bank account, or take physical possession of a property to auction it off. Although there is a process to reclaim seized assets, it is difficult and expensive. To protect yourself, contact the IRS as soon as possible to make payment arrangements or get relief on your tax debt.
Key Differences Between a Lien and a Levy
While both a tax lien and a tax levy are tools the IRS uses to collect unpaid taxes, they have distinct purposes and consequences. Here’s how they compare:
- Purpose: A lien protects the IRS’ interest in your property, ensuring it can collect the debt, while a levy actively collects the owed amount by seizing property or assets.
- Effect on property: A lien doesn’t immediately take property but restricts selling or refinancing assets, while a levy directly seizes property, garnishes wages, or freezes bank accounts.
- Timing: A lien can be issued early in the collection process, often after a payment demand, while a levy comes later, requiring prior notices and the taxpayer’s failure to respond.
In other words, a lien is like a warning, signaling the agency’s claim, while a levy is an aggressive move to take assets. Addressing a lien promptly can prevent it from escalating to a levy, saving you from significant financial and emotional stress.
What Happens if You Ignore a Tax Lien?
While a lien doesn’t take your property immediately, it sets the stage for more serious actions if the debt remains unresolved. Here’s what can happen if you ignore it:
- Reduced borrowing ability: Although tax liens do not go on your credit report, they are public records and can significantly damage your lending capabilities. Liens make it harder to secure loans, which could lead to higher interest rates when you do.
- Difficulty selling or refinancing property: If you have a lien against your property, you won’t be able to sell or refinance until the lien is resolved. This restriction can limit your financial flexibility and options.
- Escalation to a tax levy: If you continue to ignore the lien, the IRS may move forward with a tax levy. This means they could seize assets, such as your wages, bank accounts, or even physical property, to recover the debt.
- Increased penalties and interest: Ignoring the lien doesn’t stop the debt from growing. The IRS will continue to add penalties and interest, making the total amount owed even larger.
- Legal consequences: Eventually, the IRS can take legal action, which can result in garnishments, liens on additional property, or even the liquidation of assets.
By facing the issue head-on and exploring your options, you can resolve the lien and prevent further complications. Remember: Ignoring it won’t make it disappear.
How to Handle a Tax Levy
Receiving notice of a tax levy can feel like the IRS is pulling the rug out from under you. Suddenly, your wages, bank accounts, or even your property are at risk. While the situation may seem dire, the good news is that you have options to stop or prevent a levy.
- Respond to the Final Notice of Intent to Levy: The IRS doesn’t act without notice. That’s why if you receive a Final Notice with Your Right to a Hearing, the worst you can do is ignore it. This is your last chance to resolve the debt before the IRS seizes your assets.
- Request a Collection Due Process (CDP) hearing: After receiving the notice, you can request a CDP hearing within 30 days, according to the IRS website. This hearing allows you to challenge the levy and explore alternative solutions, such as payment plans.
- Negotiate a payment plan or installment agreement: Setting up a payment plan shows the IRS you are willing to resolve your debt. This can halt levy actions and provide a structured way to pay your debts.
- Prove financial hardship: If the levy causes extreme financial hardship, you can request a levy release. Demonstrating your inability to cover basic living expenses may persuade the IRS to stop its actions temporarily.
Tax levies are serious, and the process can be too much to handle alone. A tax attorney or professional can help you negotiate with the IRS, file appeals, and protect your assets from seizure.
When to Seek Professional Help
With your finances and assets on the line, you need to know when to bring in a tax attorney. With a professional by your side, you can protect your property and find real solutions to your tax problems.
Here are some situations where professional help is essential:
- You’ve received a Final Notice of Intent to Levy: If the IRS is about to seize your assets, your attorney will act quickly to stop the process.
- You’re unsure how to respond: Understanding IRS notices and procedures isn’t easy. With guidance from an attorney, you can make sure you take the right steps.
- You’re facing financial hardship: Professionals can help prove financial hardship and negotiate a halt to IRS actions.
- You need to negotiate a payment plan: A tax attorney can structure agreements that fit your financial situation and satisfy the IRS.
- You want to protect your assets: A professional knows how to safeguard your property, wages, and accounts from seizure.
When it comes to tax liens and levies, the stakes are high. Don’t wait until the situation gets worse. Contact a tax attorney now and find out what you can do to regain control of your financial situation.
FAQs About Tax Liens and Tax Levies
Confused about tax liens and levies? We get it. These IRS actions often leave taxpayers feeling uncertain and stressed, but understanding how they work can make a world of difference. Below, we’ve answered some of the most frequently asked questions to help you gain clarity and take control of your finances.
What is the main difference between a tax lien and a tax levy?
A tax lien is a legal claim on your property to secure the government’s interest in unpaid taxes, while a tax levy is the seizure of your property or assets to satisfy the debt.
Does a tax lien mean the IRS will take my property?
No, a tax lien doesn’t involve taking your property right away. It’s a claim that can affect your ability to sell or refinance your assets until the debt is resolved.
What types of property can the IRS seize with a tax levy?
The IRS can seize wages, bank accounts, personal property (like cars or boats), and even real estate.
Can a tax lien or levy affect my credit?
Although tax liens don’t appear on your credit report, they can hurt your ability to borrow by appearing in public records. A tax levy doesn’t directly impact your credit score but can create financial strain by seizing your assets.
How long does a tax lien last?
According to the IRS’ website, a tax lien lasts until the debt is fully paid or expires after 10 years if the IRS doesn’t take further action. However, resolving the debt quickly can remove the lien and limit its impact.
Can I stop a tax levy once it starts?
Yes, you can stop a tax levy by responding to the IRS’s notices, setting up a payment plan, or proving financial hardship. Requesting a Collection Due Process (CDP) hearing is also an option before the levy takes effect.
What happens if I ignore IRS notices about unpaid taxes?
Ignoring IRS notices can escalate the situation. A lien may be placed on your property, and if the debt remains unresolved, the IRS can issue a levy to seize your assets.
Should I handle a lien or levy on my own?
While it’s possible to address some IRS issues independently, working with a tax attorney or professional is highly recommended. They can navigate the process, protect your assets, and negotiate on your behalf.
How can I avoid a tax lien or levy in the future?
Staying current on your tax obligations, responding promptly to IRS notices, and setting up a payment plan for any owed amounts can help prevent liens and levies.
Who can help me if I’m dealing with a tax lien or levy?
Tax attorneys, CPAs, and Enrolled Agents are skilled professionals who can assist in resolving tax issues. They can negotiate with the IRS, protect your assets, and help you find the best solution for your situation.
Dealing with a Tax Lien or a Tax Levy? Contact Wiggam Law
Both tax liens and levies are serious IRS actions, but they serve different purposes. A lien is a claim on your property to secure unpaid taxes, while a levy is the seizure of your assets to collect the debt. Either way, it’s serious, and you shouldn’t ignore it. Acting early can prevent a lien from escalating into a levy, saving you from unthinkable financial consequences.
Need help? Contact a tax attorney at Wiggam Law today to protect your assets and regain control of your finances. Don’t wait—start taking action now to find the solutions you deserve. Call (404) 233-9800 or use our contact form to request a consultation.