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What Is The Difference Between Tax Levies and Tax Liens

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If you don’t pay or settle your federal or state tax debt, the IRS and state taxing authorities can levy, seize and sell any type of real or personal property that you own or have an interest in.

Taxpayers often interchangeably refer to levies as liens or vice versa not realizing these are two totally different terms. Tax Liens are placed on taxpayer owned property {e.g. real estate} whereas tax levies are typically garnishments of wages or bank accounts.

TAX LIENS

Let’s discuss tax liens and tax lien resolution then we will discuss tax levies and tax levy resolution.

Liens filed by IRS and state taxing authorities are typically filed with local county deeds offices. The liens are typically though not exclusively on real estate and are valid until the tax debt is paid off or the statute of limitations on collecting the debt 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 after the lien is filed, the IRS will NEVER call you. Tax resolution 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!

When the government places a lien the tax debt owed to IRS or a state taxing authority is now considered a secured debt. The tax debt is secured by the asset to which the lien is attached. When the government files a lien against a taxpayer it is their way of securing their interest in tax debt that is in arrears or past due.

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. For example, 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}. Again, 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.

Now that we have defined liens and discussed how these liens can impact taxpayers’ properties and assets, let’s discuss lien resolution.

Federal {IRS} Tax Lien Resolution:

Lien PAYMENT IN FULL/STATUTE OF LIMITATIONS: If the taxpayer pays the full balance owed to IRS, then 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 debt owed.

  • Lien DISCHARGE:
    A lien discharge removes the lien from a property. For more information on a lien discharge, please refer to 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.
  • 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, you can 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 debt as either a primary purpose on a refinance application or else the IRS will likely deny the loan subordination.
  • IRS lien withdrawal alternatives:
  • A lien can be withdrawn after a lien has been released. However, the taxpayer must be compliant by having filed all individual, business, and information returns AND be current on estimated tax payments and/or federal tax deposits.
  • According to the IRS, you can request a lien withdrawal if you enter into a direct debit installment agreement AND:
  1. You are a qualifying taxpayer (i.e. individuals, businesses with income tax liability only, and not part of any business entities which have any type of overdue tax debt)
  2. 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 Notice of Federal Tax Lien)
  3. Your Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
  4. You are in full compliance with filing and payment requirements
  5. You have made three consecutive payments
  6. You haven’t defaulted on your current, or any previous, Installment agreement

TAX LEVIES

Now let’s discuss levies. The IRS is a much more aggressive creditor than credit card or personal loan lenders. Not only will the IRS file liens, they will levy or garnish taxpayers.

WAGE LEVIES:

There are two types of levies. There are 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. The employer may or may not notify the employee. The IRS can garnish or levy a taxpayer’s entire paycheck if they choose to do so.

Plus, the IRS will garnish funds 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

The IRS can even garnish retirement income and or social security benefits up to 15%.

A taxpayer can typically resolve a wage levy by contacting the IRS Collections Department to enter into an installment agreement, submitting a CNC Currently Not Collectible status request) or submitting an OIC (Offer in Compromise). However, the taxpayer’s tax returns for the preceding 6 years must have been filed.

BANK LEVIES:

Bank levies are very 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 is no.

In short, 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 debt so that the IRS can collect from the proceeds of a sale. A levy can either attach the taxpayer’s wages or funds in a bank account etc., to pay off the overdue tax debt.

What to do if you receive a letter notifying you of a tax lien or tax levy.

First, you should act quickly. The most successful resolutions are when you act immediately and show the IRS you are serious about repayment. When you act quickly you have the opportunity to avoid many negative consequences. Acting quickly doesn’t mean you should act without a plan. The W Tax Attorneys can quickly evaluate your letter, your situation and help you 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 to you for free. You can call us, or chat with us online. There is no cost nor obligation, just answers.