What Is the Difference Between a Lien and a Levy? 

The Internal Revenue Service (IRS) and most state tax agencies use liens and levies when trying to collect unpaid taxes. Both of these collection mechanisms can have unpleasant effects on the taxpayer, and ideally, you should reach out to the IRS before it gets to this point.

This guide outlines the difference between liens and levies. 

What Is the Difference Between Lien and Levy?

A lien is a legal claim to your assets. A levy is the legal seizure of your assets for a tax bill. A federal tax lien is a public record of your tax debt that attaches to all of your assets, and if you sell or borrow against them, the IRS has rights to the proceeds. A tax levy is when the IRS takes your real or personal property.

How the IRS Uses Liens Vs. Levies

Typically, the IRS doesn't issue a lien unless you owe more than $10,000 in unpaid taxes, penalties, and interest. The IRS files the lien with your county recorder or the Secretary of State, and it attaches to your current and future assets.

The IRS uses levies when it believes there is no other way to collect the taxes owed. A levy is when the IRS takes your money or assets without your consent.

What Are the Effects of Levy Vs. Lien?

Effect of a Tax Lien for Unpaid Taxes

By establishing a legal claim to your assets, the lien ensures that you can't liquidate your assets without paying the IRS. It also ensures you can't take out loans against your assets without paying the IRS or state tax authorities.

Effect of a Tax Levy on Financial Assets

Again, a levy is when the IRS takes your assets. The IRS most commonly levies wages, checking or savings accounts, and retirement accounts. In some cases, the agency can also levy real or personal property, including your home.

The IRS may levy payments from your clients, rental income, or accounts receivable from your business. In addition to losing your assets, you lose credibility when the federal government starts collecting your debts from clients, tenants, or other professional associates.

Levy Vs. Lien Notifications 

How do you know if the IRS is going to issue a lien vs. a levy? To issue a federal tax lien, the IRS must send you a bill, and you must not pay the tax liability. The IRS must give you more notice before a levy.

Notice of Federal Tax Lien

The bill serves as your notice of federal tax lien. The IRS doesn't have to send you a separate notice. However, if the IRS sends you an Intent to File a Notice of Federal Tax Lien, the notice will outline how long you have to pay your bill before the lien gets issued, and it will also tell you how to appeal the tax lien.

Notice of Federal Tax Levy

To levy your assets, the IRS must send an Intent to File a Notice of Federal Tax Lien. Typically, you have 30 days from the date on this notice to pay the tax debt, appeal, or make other arrangements. If you don't respond, the IRS can levy your wages, bank accounts, or other assets. Typically, the notice will say what types of levy the IRS plans to use.

How to Resolve Lien Vs. Levy

You can avoid both liens and levies by paying your tax bill in full. If possible, you may want to consider taking out a loan, using a credit card, or borrowing from a family member. You can avoid a tax levy if you can prove that you are insolvent, but in that case, you probably don't have much that the IRS can levy anyway. In this case, the lien will continue to exist until it expires or you pay the tax.

Alternatively, the IRS may withdraw the federal tax lien if you set up a payment plan. You generally need to set up automatic payments (direct debits) to qualify. Typically, your tax liability must be less than $25,000, and you must be able to pay off the balance in five years or by the collection statute expiration date.  You can read our full guide on releasing IRS tax liens, which covers various aspects of resolving tax liens. 

In some cases, the IRS may agree to subordinate a lien so that you can take out a loan against your assets to pay off the tax debt. Here's an example, imagine that you have equity in your home. You want to take out a home equity loan, but the bank won't do so when there is a federal tax lien against you.

To convince the lender to approve your loan, the IRS agrees to subordinate its lien. This means that the IRS's lien takes second place to the lender's lien. Once the lender knows that it can use your home as collateral, it grants you the loan. Then, you use the funds to pay off your tax liability, and the IRS withdraws the lien.

In some cases, the IRS will remove a levy if you set up a secure payment plan. However, approval depends on the situation. You can also get a levy removed if you can prove that it's causing financial hardship.

Note that the IRS has fairly extreme ideas of financial hardship. Once a levy is in place, it's not going to be removed unless you're in a pretty dire situation. You can't just be mildly strained. The IRS may also remove a levy if the value of the property exceeds the tax debt and releasing the levy won't stop the IRS from collecting the tax due. 

Mistakes on Levies Vs. Liens

In all cases, the IRS must remove liens and levies if there is a mistake. This applies if you don't really owe the tax and/or if the IRS didn't follow the correct rules of the Internal Revenue Code when filing the federal tax lien or levy. You can also get liens and levies removed if the property wasn't really owned by the taxpayer who owes the taxes.

This can happen in a few different situations, but here's one of the most common scenarios. Imagine that you owe taxes. You are the financial custodian of your elderly parent or your disabled adult child. Your name is on their bank account so you can help manage their finances. However, all of the funds in the account are theirs. If the IRS levies this bank account, you can get the levy removed. 

Proving that the IRS made a mistake with a federal tax lien or levy requires extensive knowledge of the tax code. If you're in this situation, get help from a tax pro before the IRS takes your assets or issues liens against you.

How to Respond to Tax Levy Vs. Tax Lien

A tax levy seems more serious because it's when the IRS actually takes your assets to collect your tax liability. However, a tax lien is equally as serious, and it stays in place for a decade. Don't ignore a notice of federal tax liens or levies.

Whether you're dealing with a lien or a levy, you should contact a tax pro for help. A tax pro specialized in liens or levies can answer your questions and help you find the best resolution for your situation. Use TaxCure to find local, experienced tax help today.