The IRS has a set of legal options for collecting tax debt if you are unable to pay in a timely fashion. What is a tax levy? And what is a tax lien? Understanding the similarities and differences between these actions can help.
Tax liens and tax levies may come into play when you don't pay the taxes you owe. If you find yourself in this position, it's important to understand the actions the IRS can take. Here's what to know about tax liens, tax levies, and how they work.
What is a tax lien?
A tax lien is a tool the IRS uses to make a legal claim against property you own to secure payment of any tax debt you owe. This includes any property you acquire after the IRS puts the lien into effect.
A tax lien does not seize your property. Tax liens automatically occur within ten days of the IRS sending you the first notice of taxes owed, along with a demand for payment. The letter serves as your notification that the tax lien will go into effect.
Along with the lien, the IRS can also issue a Notice of Federal Tax Lien. This is a document filed in your local public records. It notifies creditors about the federal tax lien on your assets.
The IRS will notify you within five business days of the first filing of the Notice of Federal Tax Lien. You'll receive a notice of the lien filing and a letter that explains your right to a Collection Due Process (CDP) hearing. This is an optional meeting to discuss the lien and the amount you owe.
How can I avoid a tax lien?
The IRS will send you a bill demanding payment in full for any taxes owed if you file a tax return and don’t pay the taxes you owe in full. You can avoid tax liens by paying any taxes you owe in full. That may not always be possible based on your financial circumstances.
If you can't pay your tax bill in full, don't wait for a tax lien notice to arrive. Ideally, you should reach out to the IRS before notices are issued to see how you can work with them. The IRS offers several programs to taxpayers who can’t pay the taxes they owe.
Potential options may include:
- Applying for an installment agreement
- Applying for an offer in compromise
- Asking the IRS to delay collections
If the IRS puts a tax lien in place, you as the taxpayer generally can't remove it until you pay the taxes and the associated interest, penalties, and recording fees. A federal tax lien may also be withdrawn after the IRS is no longer legally allowed to collect the tax, which typically occurs ten years after the tax assessment.
The IRS may withdraw the Notice of Federal Tax Lien under certain circumstances, such as if you and the IRS create an installment agreement. However, the tax lien itself would remain in effect. The IRS would only withdraw the public notice.
What is a tax levy?
A tax levy is the next step in the collection process after a tax lien and occurs when the IRS seizes your property to pay taxes owed. The IRS may levy a variety of assets:
- Money in your checking account
- Tax refunds
- Wages from your job
- Other property
The IRS will then convert these assets into cash and use that money to pay down the debt you owe.
The IRS cannot levy your property in the following situations:
- You have a current or pending installment agreement or offer in compromise
- The IRS determines you’re unable to pay due to economic hardship
How do I know a tax levy is coming?
A levy shouldn't be a surprise. Before the IRS seizes your property, they must meet certain requirements under most circumstances. The first is assessing the tax you owe and sending you a "Notice and Demand for Payment" letter.
If you don't pay the balance owed, the IRS sends a "Final Notice of Intent to Levy and Notice of Your Right to a Hearing" letter at least 30 days before the levy takes place. Other letters and notices may also be sent.
Not responding to the letters at all will result in the levy moving forward. You may be able to avoid or delay a levy by working with the IRS. The IRS may agree to settle your tax debt or set up a payment plan as alternatives.
In some instances, a levy may occur without the 30 day notice. If this happens, you’ll get a notice after the levy has been carried out. This could happen when:
- Waiting may jeopardize the collection of the tax
- The levy collects tax from a state tax refund
- The levy collects a federal contractor’s tax debt
- A Disqualified Employment Tax Levy (DETL) is served for unpaid employment taxes
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