Understanding IRS Liens & Levys

We all know that the IRS is the most powerful collections agency in the United States.  They have tools at their disposal that the average debt collector doesn’t.  As such, one should always be motivated to file their taxes on time, least they find themselves on the wrong side of the IRS collection machine.  In this post, we’ll talk about two of the most powerful weapons that the IRS can turn loose on a taxpayer; an IRS lien or levy.

Tax Liens
A tax lien gives the IRS claim to your property.  It’s their security towards ensuring that you pay the taxes owed to them.  Your “property” essentially means any and everything that you own.  This can include items such as your house, car, retirement accounts, social security payments or your paycheck (yup, that is fair game too).

If you try to just “disappear” and get rid of your assets, you’ll quickly find that it will be next to impossible because of the lien.  This is because once it is filed, it attaches to all of your property.  All of your creditors will be notified of the tax lien, which means that if you sell your house, car, or other property, the IRS will be the first to get paid, not the creditor.

Section 6321 of the Internal Revenue Code states that:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

Now, the important thing to know about a lien is that the IRS cannot just cannot file it at will. There are procedures that they must follow:

  • The IRS must assess the liability against you
  • They must send you a Notice and Demand for Payment (essentially a bill that tells you how much you owe)
  • You have ten days to pay the taxes owed after the IRS sends the above notice
  • If you fail to pay after the ten days, a tax lien will automatically be filed against you

Paying your tax debt in full is the best way to get rid of a tax lien.  Once you pay your debt (including any interest and other additions) the IRS will issue a Release of the Notice of Federal Tax Lien.  This is supposed to be filed within thirty days of the tax debt being paid, however, it is not uncommon for it to not be done. And even if they do, it can take months or years for the release to be picked up by credit reporting agencies.

Tax Levies
A levy is the legal seizure of your property to satisfy a tax debt. Levies are different from liens in that a lien is a legal claim against property to secure payment of the tax debt, while a levy actually takes it.  Section 6331 of the  Internal Revenue Code authorizes levies to collect delinquent tax.

Similar to a lien, the IRS will usually only levy a taxpayer after the following requirements are met:

  • The IRS assessed the tax and sent you a Notice and Demand for Payment (a tax bill);
  • You neglected or refused to pay the tax; and
  • The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (IRS Letter 1058) at least 30 days before the levy. The IRS may give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address by certified or registered mail, return receipt requested.

When will the IRS issue a levy?  If you do not pay your taxes (or make arrangements to settle your debt), and the IRS determines that a levy is the best action it has to collect on the taxes due.  Note that the IRS could levy property that is yours, but is held by someone else (such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions). Or, the IRS could seize and sell property that you hold (such as your car, boat or house).

The best way to avoid a levy is to work out a resolution with the IRS.  This could include a payment plan, collection activity being temporarily suspended, or some other solution.  It’s only when a taxpayer ignores the IRS, that they pull out the big guns to get them to comply.

Have A Lien or Levy Filed Against You?
If you need help resolving enforced collections activity that is being taken by the IRS, give us a call or check out our Got IRS Debt page to learn how we might be able to help solve your problem once and for all!