Introduction to IRS Notices: Liens vs Levies
When dealing with the Internal Revenue Service (IRS), two commonly misunderstood terms are the federal tax lien and tax levy. Both are measures used by the IRS to collect outstanding taxes, but they have distinct roles and implications for taxpayers. Understanding the differences between these two can help you better navigate financial and legal obligations.
What is a Federal Tax Lien?
A federal tax lien is a legal claim by the government against your property when you fail to pay a tax debt. This encumbers all your current and future assets until the debt is paid, ensuring the government has priority over other creditors. According to the IRS, 'A Notice of Federal Tax Lien is the public document that alerts creditors that the IRS has a legal claim against your property' (IRS Publication 594).
The lien is automatically triggered when:
- Tax is assessed.
- A demand for payment has been made.
- The amount remains unpaid.
What is a Tax Levy?
A tax levy, on the other hand, is an actual seizure of property to satisfy a tax debt. Unlike a lien, which secures the IRS’s interest in your assets, a levy permits the IRS to legally take your property, such as funds from your bank accounts, wages, or other assets. As outlined by the IRS, 'If you don’t pay your tax debt, the IRS can seize and sell property that you hold or honor the property to someone else' (IRS Topic No. 201).
Key Differences Between Liens and Levies
While both are enforcement tools for the collection of taxes, they have fundamental differences in terms of function, impact, and procedure:
- Function: A lien is a claim; a levy is an action.
- Outcome: A lien doesn’t involve taking property while a levy results in seizure.
- Procedural Steps: Liens are automatically issued after certain notices, but levies come after extensive notice and filing opportunities.
- Effects: Liens affect credit scores and property rights, whereas levies directly reduce your assets.
Steps to Resolve a Tax Lien
To effectively deal with a tax lien, consider the following actions:
- Pay the Debt: Full payment results in lien release. Confirm the clearance with IRS Form 668(Z).
- Discharge Property: Sell property encumbered by the lien and apply proceeds towards debt.
- Subordination: Request the IRS to allow other creditors to take precedence for smoother financing (refer to IRS Form 14134).
Steps to Resolve a Tax Levy
Addressing a tax levy swiftly can prevent significant financial distress. Consider these avenues:
- Immediate Payment: Paying in full immediately stops the levy.
- Installment Agreement: Negotiate a payment plan with the IRS.
- Offer in Compromise: Settle the tax liability for less than the full amount owed if circumstances allow (see IRS Form 656).
Always stay vigilant with IRS communications and seek professional help if required.
Actionable Steps
- Review all IRS communications promptly.
- Contact a tax professional for guidance on complex IRS interactions.
- Explore all payment options and settlements with IRS-approved forms and documentation.
FAQs
- What triggers a federal tax lien? When taxes are assessed, payment is demanded, and it remains unpaid.
- Can a levy be reversed? Yes, by settling the tax debt in full, negotiating an agreement, or other IRS arrangements.
- How long does a lien last? Typically until the debt is satisfied, or up to ten years with possible renewals.
- Does a lien affect my credit score? Yes, it can significantly impact your credit score and financial standing.
- Are all levies the same? No, levies can target different assets such as wages, accounts, or property.
- Can I sell property with a lien? Yes, but specific IRS approval and discharge procedures must be followed.
- How can I prevent a levy? Actively communicate with the IRS, explore payment options, and adhere to agreements.
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