Understanding Notice of Federal Tax Lien vs. Levy: Key Differences

Introduction

The United States Internal Revenue Service (IRS) employs various methods to ensure tax compliance. Among the more significant actions it can take when taxes are owed are filing a Notice of Federal Tax Lien (NFTL) and issuing a levy. While often mentioned together, these terms refer to different tools the IRS uses to collect taxes. Understanding the distinctions between them is crucial for taxpayers who need to navigate the complexities of tax regulation.

What is a Notice of Federal Tax Lien?

A Notice of Federal Tax Lien is a public document filed by the IRS to indicate that the government has a legal right to your property as a result of unpaid tax debt. It attaches to all your property, including real estate and personal property, and it can also affect your financial assets.

How a Lien Works

A lien arises automatically if you fail to pay your tax debt after being properly notified and given a chance to do so. The IRS files the lien notice to alert creditors, which may affect your ability to secure financing or sell property. Reference: IRS Publication 594.

Discharging a Lien

The lien remains in place until it has been paid in full, the time limitation for collection expires, or other settlement arrangements are made. Taxpayers can seek lien discharge, withdrawal, or subordination under certain circumstances. See IRS Form 12277 for withdrawal procedures.

What is a Levy?

A levy is a legal seizure of your property to satisfy a tax debt. Unlike a lien, which is a claim against property, a levy actually takes property to satisfy the tax debt. It's a more direct and aggressive enforcement measure.

How a Levy Works

Before seizing property, the IRS must send a final notice (Notice of Intent to Levy and Your Right to a Hearing), typically at least 30 days before the levy. During this time, taxpayers can appeal or pay the tax to prevent the levy. Reference: IRS Publication 1660.

Types of Property the IRS Can Levy

• Bank accounts
• Wages and other income
• Real property and vehicles
• Other personal property

The IRS may also levy state tax refunds and, in some cases, Social Security benefits.

Key Differences Between a Lien and a Levy

While both the lien and levy are tools for tax collection, their purposes and consequences are quite different.

• Nature: A lien is a claim against your property, while a levy is an actual seizure.
• Notice: A lien does not allow immediate seizure, whereas a levy involves the physical taking of property.
• Purpose: A lien secures the government's interest, while a levy satisfies the debt through seizure.

Resolving Tax Issues with the IRS

Dealing with tax liens or levies requires prompt action. Options include setting up an installment plan, making an offer in compromise, or proving financial hardship. The IRS offers appeals processes for both liens and levies through its Collection Appeals Program.

Conclusion

Understanding the differences between a Notice of Federal Tax Lien and a levy is vital for any taxpayer facing these issues. Acting swiftly to address tax debts can help avoid severe consequences. For specific guidance, consult the IRS or a tax professional.

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