Notice of Federal Tax Lien vs Levy - Key Differences

Understanding IRS Liens and Levies

The Internal Revenue Service (IRS) wields considerable power to collect taxes owed to the federal government. Two central instruments in their arsenal are the Notice of Federal Tax Lien and the Levy. While they may seem similar, they serve distinct purposes in tax collection. This article will dive into the complexities of each, their implications for taxpayers, and actionable steps to address them.

What is a Notice of Federal Tax Lien?

A Notice of Federal Tax Lien is a public record that tells creditors the government has a legal right to your assets due to unpaid tax debts. This notice secures the government’s interest and establishes priority over other creditors for the amount owed. It covers all your assets, like property, bank accounts, and potentially future acquisitions.

According to the IRS (IRC §6321), a lien arises automatically when:

• A tax assessment is made.
• The taxpayer fails to pay the debt after receiving a demand for payment.
• The IRS files a Notice of Federal Tax Lien with the appropriate government office.

Purpose and Impact of a Notice of Federal Tax Lien

While a lien does not seize property, it affects your credit score, real estate transactions, and your ability to secure loans. Since it is a public notice, it alerts creditors to your tax liabilities. To resolve a lien, the best course is to pay the full tax debt, which will result in the IRS releasing the lien within 30 days of payment (IRC §6325(a)).

What is a Levy?

An IRS levy goes a step further. It is the legal seizure of your property to satisfy your tax debt. Unlike a lien, a levy actually takes and sells your property or garnishes your wages or bank accounts. It is often the last resort after the IRS has exhausted other collection methods.

The IRS must provide a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing (IRS Letter 1058 or LT 11) at least 30 days before the levy process begins (IRC §6331(d)).

Consequences of a Levy

A levy significantly impacts your financial stability as it directly removes assets or income. It is crucial to address a levy promptly to mitigate the financial burden it creates. Unlike a lien, a levy immediately affects your cash flow by freezing accounts or garnishing wages.

Key Differences Between Liens and Levies

1. Nature of the Action

A lien is a claim or legal right against assets, whereas a levy involves the actual seizure and sale of property.

2. Purpose

Liens serve as public notice of debt and secure the government's interest, while levies actively collect the owed amount by liquidation of assets.

3. Impact on Taxpayer

Liens affect creditworthiness and future financing, while levies immediately impact liquidity and available funds.

4. Preceding Notices

Both actions require initial IRS notices, but the notices differ in content and timing requirements.

Actionable Steps for Taxpayers

• Review IRS Notices: Carefully read any notices received from the IRS to understand your obligations and deadlines.
• Communicate with the IRS: Engage with the IRS early on to negotiate payment plans or resolve discrepancies.
• Seek Professional Help: Consider hiring a tax professional to navigate complex tax issues and negotiate with the IRS on your behalf.
• Explore Payment Options: Consider options such as an Installment Agreement or an Offer in Compromise to satisfy tax obligations over time.
• Utilize Your Rights: Remember your rights to a Collection Due Process hearing regarding a levy or lien (IRC §6330).

Conclusion

Understanding the distinct roles of a lien and a levy is crucial in managing your tax obligations. Act promptly to address these issues, reducing potential financial consequences. For detailed guidance, visit our expert professionals by logging into your account at /dashboard.