Tax Liens and Levies

Understanding Liens

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in real estate, personal property and financial assets. It arises after the IRS assesses your liability, sends you a bill (Notice and Demand for Payment) and you neglect or refuse to pay. The IRS then files a Notice of Federal Tax Lien (NFTL) to alert creditors that it has a legal right to your property.

Consequences and taxpayer rights:

• Impact on assets and credit. A lien attaches to all your existing and future assets; it may limit your ability to obtain credit or sell property. The NFTL is public and may affect business property, accounts receivable and even survive bankruptcy.
• Avoiding a lien. Filing and paying all taxes on time is the simplest way to avoid a federal tax lien. If you cannot pay in full, work with the IRS—payment options and collection alternatives are available.
• Removing or reducing the lien. Paying your tax debt in full results in release of the lien within 30 days. In certain circumstances you may request a discharge of specific property, subordination (allowing other creditors to take priority) or withdrawal of the NFTL. Withdrawals may be available if your balance is below $25,000 and you convert to a direct debit installment agreement and meet compliance requirements.
• Appeal rights and assistance. You can appeal the filing of an NFTL through the Office of Appeals and may contact the Taxpayer Advocate Service for help.

Understanding Levies

A levy is the legal seizure of your property to satisfy a tax debt. While a lien merely secures the government’s claim, a levy actually takes the property to pay the debt. The IRS may levy any property or right to property that belongs to you—including wages, bank accounts, retirement accounts, licenses, rental income, accounts receivable and the equity in cars, boats or homes.

Before the IRS issues a levy it must generally:

1. Assess the tax and send you a Notice and Demand for Payment.
2. Determine that you neglected or refused to pay the tax.
3. Send you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy. You may receive this notice in person, at your home or business, or by certified mail.
4. Provide advance notification that the IRS may contact third parties regarding your tax liability.

If you ignore IRS billing notices, the agency may levy wages, bank accounts or seize and sell property. To avoid a levy, file returns on time and pay taxes when due; if you cannot pay, request an extension or set up a payment plan and don’t ignore IRS notices. Being proactive—paying as much as you can and contacting the IRS to resolve your balance—prevents levies.

Releasing a Levy

If a levy is issued, you should contact the IRS immediately to resolve your tax liability and request a levy release. The IRS is required to release a levy if it determines that:

• You paid the amount you owe or the collection period expired.
• Releasing the levy will help you pay your taxes.
• You enter into an installment agreement that does not allow the levy to continue.
• The levy creates an economic hardship, meaning it prevents you from meeting reasonable basic living expenses.
• The property’s value exceeds the amount owed and releasing it will not hinder collection.

Be aware that releasing a levy does not eliminate the tax debt; you must still make arrangements to pay the balance. If your request for release is denied, you may appeal before or after the levy is issued, and you have the right to request return of levied property.

Understanding the differences between liens and levies and communicating with the IRS early can help you protect your assets and resolve tax debt efficiently.