The Difference Between an IRS Lien and IRS Levy

If you have run into trouble with the IRS and owe them back taxes, you may be faced with either an IRS lien or IRS levy on your property. Understanding the differences between liens and levies will help you make the best-informed decision about what actions to take next.

A lien is a legal claim made by the IRS to secure payment if you have a tax debt. This means that the IRS will place a claim against your property for a pre-set period. This means that you have until the end of that time to pay off your tax debt. If you manage to pay off the debt or reach another agreement with the IRS, then the lien is removed. However, if you cannot pay off your debt, then the lien could become a levy.

A levy is the seizure of your property designed to pay off a tax debt. This means that the IRS will actually take possession of enough of your property to satisfy what is owed to them. Under such circumstances, you may lose your bank account, large portion of your paycheck, home, vehicles, and household property which will be sold off to pay for the debt that you owe.

For the most part, an IRS lien affects real estate. This means that if you own a home or real estate property, that will usually be the first thing the IRS will place a lien. While the reasons may vary, the most common one is that real estate rarely depreciates, so it can be re-sold for its current or even greater value. Plus, it’s the type of property that will motivate those with an IRS lien to pay it off quickly.

A lien basically gives the IRS an interest in your property, most likely real estate. For example, if you have a home worth $200,000 and your mortgage is currently at $100,000, the you will have $100,000 of equity in the home. The IRS lien essentially claims the equity that you have in your home. So, if you decide to sell your property, the IRS will be able to claim the equity that you have built up at closing.

The IRS tax lien will be filed with the county clerk of courts or county recorder where the property itself is located. A lien not only claims the property itself, but all property that is on the real estate, including personal property.

Keep in mind that you do have 30 days once the notice of the IRS lien has been posted to file an administrated appeal. Called an appeal of CDP collection due process, this will allow you to contest the tax lien, so that your property is not under claim.

If the lien remains in place, it will stay there for a maximum of 10 years as that is the statute of limitations under most circumstances.

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A tax lien is a public notice / document which does alert creditors that the IRS is pursuing your assets. So, any credit reporting agencies will discover an IRS tax lien as part of a notice which will be included in your tax report.

Needless to say, this can impact your credit rating severely in terms of getting approved for loans because it demonstrates that you owe the IRS unresolved money. Given that the IRS is usually first in line when collecting debt, many lenders may shy away from you if they see this notice. Once you have paid off the tax debt, the notification of the lien is removed from your credit rating.

A tax levy is different since it is not part of the public record and will not affect your credit report. It may sound counterintuitive since the levy is more severe in nature as the IRS has wipe away your bank account and or garnish your paycheck. However, because the debt is being collected from your existing liquid assets, it does not apply to your credit report. So, lenders will not know that some of your assets are being seized through an IRS tax levy. Of course, this still may affect your ability to secure loans through collateral that you may no longer own.

The levy is really the same as a garnishment or seizure, which means that it usually affects your bank account, wages, accounts receivable, subcontractor pay, social security, pension, and even your retirement savings. It is also true that an IRS levy may be used to seize your home, vehicles, and business equipment, although in practice that is relatively rare.

What a tax levy does not cover includes workers compensation, unemployment benefits, and most household items along with the tools you use for your trade. The exceptions are listed in the Internal Revenue Code 6334.

The answer is no. The IRS is only required a Final Notice and not any tax lien before the levy is initiated. This occurs when the Department of Justice files a lawsuit against you in Federal District Court, which paves the way for them to seize your property.

An IRS levy does not come without a warning. You are sent a Final Notice of Intent to Levy before the IRS can take any action. You will have 30 days to file an appeal, CDP collection due process which will create an appeal hearing. The IRS cannot seize your property until the hearing is completed. The purpose of the hearing is to create some type of compromise or agreement that averts the collection process, but still provides some type of compensation in lieu of the unpaid back tax debt.

There is little question about the power of the IRS tax lien and IRS tax levy. Keep in mind that both are used only sparingly in collecting tax debt. With proper negotiation and the right representation, most people find ways to pay the debt without having to face a lien or levy of their property.

Get a free case evaluation at 877-788-2937.