Tax Levies and Tax Liens – What’s the Difference?
Tomayto Tomahto, Potayto Patahto – aren’t levies and liens the same thing?
The short answer is NO. Taxpayers often use the words “levy” and “lien” as one and the same not realizing these are two totally different terms with different and important implications for your tax case.
Simplistically – the difference between a levy and a lien is that a lien secures the government’s interest in an asset when you don’t pay your tax liability so that the IRS can collect from the proceeds if you decide to sell. A levy however attaches to the taxpayer’s wages or bank account to pay off the overdue tax liability.
Let’s take a close look…
Liens filed by IRS and state taxing authorities are typically filed with local county deeds offices. The liens attach to any and all of your personal and real property including real estate and your car. The lien is valid until the tax liability is paid off or the statute of limitations on collecting the liability has run out. The IRS or state taxing authority will send a written letter notification to the taxpayer after the lien has been filed.
But remember, although the IRS sends a letter after the lien is filed, the IRS will NEVER call you. Once a lien is filed, its public record and tax companies will jump on it to scare you and convince you that you need their help. Tax companies may call you to try and get your business. Or much worse, you may be the subject of a scam by phone. Never give out personal information based upon a phone call you received from someone claiming they can help you or that they are calling on behalf of the IRS!
Consequences of a Tax Lien:
- Assets — A lien can deter or prevent the sale of an asset because it restricts or hinders a clear title search. The lien must be paid off or subordinated for the sale to occur. You may not be able to sell your home.
- Credit — A tax lien could limit the taxpayer’s ability to obtain credit and or refinance their home (most reputable lenders will not refinance a mortgage with an existing lien on the property). A lien subordination approved by the IRS is possible if proceeds of the refinance will go to the IRS.
- Business— The lien attaches to all business property and to all rights to business property, including accounts receivable..
A Lien was Filed – What do you do Now!?!?!
LIEN PAYMENT IN FULL/STATUTE OF LIMITATIONS: If the taxpayer pays the full balance owed to IRS, the IRS will release the tax lien in 30 days. State taxing authorities may have similar policies. Similarly, the IRS will release the lien in the event the 10-year statute of limitations runs on the liability owed.
But those probably aren’t realistic options for you. Here are some that might:
- IRS Lien DISCHARGE:
A lien discharge removes the lien from a property. So if you want to sell your house and pay off some of your tax liability, you can work with the IRS to negotiate a payoff amount so you can sell your house free and clear. For more details, take a look at Publication 783, Instructions on How to Apply for Certificate of Discharge from Federal Tax Lien. A Certificate of Discharge application should be submitted to IRS at least 45 days in advance of the transaction date that the certificate of discharge is required.
- IRS Lien SUBORDINATION:
“Subordination” does not remove the lien but allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage. For more information on lien subordinations, refer to Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien. The taxpayer must specify they’re paying overdue tax liability as either a primary purpose on a refinance application or else the IRS will likely deny the loan subordination.
- IRS Lien WITHDRAWAL:
A “withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property, but the taxpayer is still liable for the amount due. For more information on lien withdrawals, take a look at Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien (Internal Revenue Code Section 6323(j) and the video Lien Notice Withdrawal.
Here’s a pro tip – you request a lien withdrawal if you enter into a direct debit installment agreement AND:
- You are a qualifying taxpayer (i.e. an individual, a businesses with income tax liability only, and not part of business entities which have overdue tax liability)
- You owe $25,000 or less (If you owe more than $25,000, you may pay down the balance to $25,000 prior to requesting withdrawal of the Tax Lien)
- Your Installment Agreement must full pay the amount you owe within 72 months or before the Collection Statute expires, whichever is earlier
- You are in full compliance with filing and payment requirements
- You’ve made three consecutive payments on your payment plan
- You haven’t defaulted on your current, or any previous, Installment Agreement
And then there’s levies. The IRS is a much more aggressive creditor than credit card or personal lenders and has much more power to take money from you. It’s frightening how much power they have and how easily they can take your money.
IRS WAGE LEVY and IRS WAGE GARNISHMENT:
There are two types of levies. There are IRS wage levies and bank levies. When the IRS or a state taxing authority decides to garnish or levy a taxpayer’s wages, they notify the taxpayer’s employer to withhold a certain portion of the taxpayer’s check and send it to the IRS.
The IRS will even garnish money owed to you by third parties. Just because you are self employed and earn 1099 income does not mean you are not susceptible to a wage garnishment.
Retirement income and or social security benefits can be garnished as well – up to 15%.
Bank levies are time sensitive! The IRS and state taxing authorities will send a letter to the taxpayer’s bank. This letter stipulates the amount of funds to be garnished and the remittance date. The remittance date is typically 21 days or less. Upon receipt of this letter, the bank complies with the demand of the IRS and state taxing authorities and freezes the taxpayer’s funds in the bank account. Once frozen the taxpayer is unable to access or spend the funds within the bank account.
If the taxpayer does not contact the taxing authority responsible for issuing the levy and resolve the tax matter prior to the remittance date, then the amount of funds stipulated in the letter will be garnished. I am repeatedly asked “The remittance date has passed. Can I get my money back?” The answer generally is “no”.
What to Do if you Receive a Letter Notifying you of a Tax Lien or Tax Levy.
First, you need to act quickly. The most successful resolutions occur when you act immediately and show the IRS you are serious about repayment, but you have to call with a plan. Call a tax professional for help – there’s too much at stake for you to do it by yourself.
The W Tax Group Tax Attorneys will quickly evaluate your letter, and your situation and take action immediately. We understand you may be in this situation because you have little money to pay the IRS. This is why we offer free consultations to give you answers and show you what options are available.
Lead Tax Attorney, The W Tax Group