What Is a Levy and Lien? What's the Difference
A lien is a legal claim against your assets, and a levy is when the government takes your assets for unpaid taxes. If you're behind on your tax obligations, you'll probably receive letters from the IRS or your state threatening liens and levies – while both are serious, a levy is worse, and it's critical to know the difference if you owe back taxes.
This guide outlines the difference between liens and levies. To protect your assets now, use TaxCure to find a licensed tax professional today.
Key takeaways
- Lien vs levy – lien is a legal claim, while a levy is the seizure of assets.
- The IRS and state revenue agencies use liens and levies to collect unpaid taxes.
- A lien is a public record of your tax debt; it records the tax agency's legal claim to your assets.
- A levy is when the tax agency seizes your wages or assets to cover your back taxes.
- The IRS must notify you with 5 days of filing tax liens and at least 30 days before levying assets.
What Is the Difference Between Liens and Levies?
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.
| IRS Lien vs IRS Levy | ||
|---|---|---|
| Lien | Levy | |
| Meaning | Notice of the IRS's claim to your assets for unpaid taxes | IRS seizure of wages, bank account deposits, or assets |
| Effect on taxpayers | Makes it difficult to sell, transfer, or borrow against property. Gives the IRS the right to proceeds from sales or loans. | Puts wages, cash, investments, and personal/real property at risk of seizure. |
| Notice | Notice of Federal Tax lien – within 5 days of filing | Notice of Intent to Levy at least 30 days before the levy |
| Appeal rights | Collection Due Process hearing within 30 days of the lien notice; Collection Appeals Program before or after the lien is filed. | Collection Due Process hearing within 30 days of the levy notice; Collection Appeals Program |
Check out these links to learn more about the appeals process if you're facing or currently dealing with a tax lien or levy: Collection Due Process (CDP) hearing and Collection Appeals Process (CAP) appeals.
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, but the agency may issue federal tax liens for lower amounts of tax debts. For example, if the IRS knows that you're filing bankruptcy, they may file a tax lien (not allowed when the courts issue a stay), to alert other creditors about their claim to your assets. 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. Examples include wage garnishment, bank levies, and asset seizure. Generally, the IRS must file a tax lien before moving forward with a levy, but that's not strictly required in all cases as long as the agency gives you the right notice and alerts you of your right to a CDP hearing.
What Are the Effects of Levy Vs. Lien?
The effects of liens vs levies are different. Let's take a look at how each of these collection tactics affects you.
Effects of a tax lien
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.
For example, say you sell your home for $300,000 and you owe $150,000 to the mortgage company and $100,000 to the IRS. The closing company will send $150,000 to the mortgage lienholder, $100,000 to the IRS for its lien, and you'll get the rest.
Effects of a tax levy
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, effectively shutting down 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
By law, the IRS must notify you about tax liens and levies. Here are the rules.
Notice of Federal Tax Lien
The IRS must send you a notice within five days after filing the lien. The notice must outline your CDP appeal rights and give you 30 days to appeal.
Notice of Federal Tax Levy
To levy your assets, the IRS must send a Final Notice of Intent to Levy with your right to a hearing. 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.
How to Resolve Lien Vs. Levy
You can avoid both liens and levies by paying your tax bill in full. You can avoid a tax levy if you can prove that you are insolvent and get your account marked as currently not collectible, 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.
Resolving tax liens
There are a few ways to avoid liens or resolve tax liens even if you still owe back taxes:
- Avoid – set up an installment agreement before the IRS files the lien; if you owe under $50,000, the agency generally will not file a tax lien.
- Withdraw after filing – if you owe less than $25,000 and set up a payment plan over five years or until the collection statute expiration date if sooner, the IRS will withdraw the tax lien once you make three payments.
- Subordination – the IRS agrees to take priority behind another lender, generally so that you can take out a loan against your home or another asset to repay the taxes.
- Discharge – the IRS agrees to remove the lien from a single asset, typically because the asset has no equity or so that you can sell the asset to pay the tax debt.
A lien release happens when you no longer owe a tax debt, and the IRS releases the lien.
Resolving tax levies
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 or that it was issued in error – for example, the IRS must release a levy if they don't send you the right notices.
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.
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,
- the IRS didn't follow the correct rules of the Internal Revenue Code when filing the federal tax lien or levy, or
- the property wasn't really owned by the taxpayer who owes the taxes.
Here's one of the most common scenarios of a levy happening against an asset you don't own. 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.
However, putting assets into other people's names doesn't protect you from a levy. The tax code allows the IRS to seize certain types of recently transferred assets.
How to Respond to Tax Levy Vs. Tax Lien
To protect yourself, you should make payment arrangements on your tax debt before the IRS files a lien or moves forward with a levy. However, if that's not possible, you should appeal when you receive the lien or levy notice. During the appeal, you can talk about payment options and why the IRS shouldn't issue a lien or levy. You may also appeal the tax liability in a CDP hearing but only if you haven't done so in the past.
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.
FAQs about liens vs levies
The differences between liens and levies can be complicated. To help you deepen your understanding of these collection tactics, here are answers to some frequently asked questions.
Why do IRS notices mention liens and levies?
If you're behind on paying taxes, the collection notices you receive will mention liens and levies – sometimes the first couple notices don't mention liens and levies, but you will definitely see these words on subsequent notices. The IRS is telling you that they may resort to these tactics if you don't respond and set up payments.
Is the IRS more likely to use liens or levies?
The IRS generally files more liens than levies. However, the agency relies heavily on both of these tools to collect unpaid taxes when taxpayers don't come forward voluntarily.
Which comes first, liens or levies?
Liens generally come before levies. However, the IRS doesn't necessarily have to file a Notice of Federal tax Lien (NFTL) before initiating a levy. As soon as a tax debt is assessed, a statutory lien arises – the Notice of Federal Tax Lien arises when the IRS files the tax lien with the county clerk or Secretary of State, creating a public notice of the lien.
How long before a lien becomes a levy?
A lien doesn't become a levy, but a lien often occurs before a levy. Regardless of when the lien was filed, the IRS must alert you 30 days before initiating the levy. Sometimes, the IRS files liens years before initiating levies.
Are there state liens and levies?
Yes, most states use liens and levies to collect unpaid taxes. But some states use the phrase "warrant" to describe liens or other alternative phrases such as "income execution" instead of "wage garnishment" for wage levies.