People are often confused about the various collection options available to the IRS and their effects. Two tools the IRS has in its arsenal are a lien and a levy, which they use aggressively. With respect to tax payers not paying their taxes and liabilities, a gentler approach is a distant memories.
Not only do some fail to get the terms lien and levy, neither do they understand the different actions either can represent. While both can be filed by the IRS, there are very few other similarities to go on. Allow us to present you with the link between these two, their differences, effects, and how to steer away from them, because you honestly wouldn’t want to run into either unless of course, you can pay.
And in case you’re wondering where the IRS is going to catch up with you, pay attention to the following because, well, you’re not alone.
When Can a Levy or Lien Be Filed and by who?
Levies and liens can be filed against you by the federal and state tax authorities when you either neglect or refuse to settle a tax bill you have received from these agencies. The type of action you will receive, that is between a levy and a lien, will depend on what measures the IRS/ state deem best for your particular tax filing situation.
IRS Tax Lien
A lien is public record filed with the local clerk of courts providing notice that the IRS has a claim to the property (real and personal) of the taxpayer. It essentially makes the property collateral to secure payment of the debt that you owe them. A tax lien notice is issued within five days of filing just in case you forgot to pay your taxes and were not actually running.
In some instances, the IRS will allow creditors priority from whom you have secured property within the last 45 days to reclaim their asset. You should take in mind that an IRS Notice of a Federal Tax Lien is a public record that will be published in your local papers. Anyone who reads them including your family members or that old guy at the park bench will find out that you were unable to pay your taxes.
While this may sound like the death knell, it is not the most potent collection weapon in the IRS’ arsenal; the levy is.
IRS Tax Levy
A levy, on the other hand, is an actual attempt by the IRS to seize your property, such as real estate, personal property, or cash you may have in a bank account. The IRS will normally send you notice (30 days validity) of their intent to levy via certified mail prior to the actual levy. You will have a short period of time to react to the notice and potentially stop the levy from taking place.
Levies are usually used by the IRS when a taxpayer either fails to respond to repeated attempts at collection, or if the IRS is concerned that particular assets of the taxpayer may soon become unavailable for collection purposes due to sale or other disposition. Typically, they up the ante.
The IRS can choose to place a levy on any if not all applicable assets in your name. Most of the time, levies apply to:
- Savings and checking accounts
- Retirement accounts
- Wages and salary accounts
- Accounts receivables
- Subcontractor pay
- Rental income
- Physical assets
However, the law bars the IRS from placing levies on certain assets or sources of income to prevent you from losing everything.
How a Lien Affects You
A lien affects you in a number of ways. It touches on your assets, business, credit, and even bankruptcy proceedings.
- Assets – a lien attaches to your entire assets and even future ones you may acquire as long as the lien is still in place.
- Credit – a notice of lien dents your credit ratings because it is reported to the credit bureau. You may therefore not be able to obtain credit.
- Business – a tax lien secures the government’s interest in your business property as well as other business interests like accounts receivable.
- Bankruptcy – even after you file for bankruptcy, any back taxes you may have in addition to your Federal Tax Lien Notice remain in place.
How a Levy Affects You
The size of your debt determines how a levy is affected on you. The all important question you need to ask yourself is how much you really owe the IRS. However, the IRS will often go for the easiest collection method. These methods include:
- Property seizure
- 1099 levy- this is a tax levy on the receivables you are currently owed and not future ones.
- IRS bank levy – this is an IRS request to your bank(s) to freeze your accounts for 21 days to facilitate recovery of their debt. Woe unto you if your accounts are emptied and you still have a balance.
Getting Out of a Levy or Lien
IRS levies and liens are serious issues. Getting out of them is not easy, but an experienced tax practitioner can sometimes get a levy lifted. A lien, on the other hand, normally remains in place until the underlying tax debt is resolved. In either case, a quick response is required to properly deal with the IRS.
Yes, a Lien and Levy are Different
A lien comes before a levy, and dealing with a levy is much more difficult because a levy is an actual seizure. Even if you are in a situation where you know you haven’t paid your taxes but have not yet been contacted by the IRS, it’s best to deal with them now. You never know they could just be getting ready to create a whole lot of financial obstacles in your path.
And just in case you have already received lien or levy notices, get in contact with the professionals like TaxLane to settle your debt with the IRS and move forward with your life.