If you’ve ever faced tax issues, you’ve probably come across the terms “levy” and “lien.” While they might sound similar, they’re actually quite different.
You might be worried about a tax bill or stressed after receiving a notice from the IRS. Suddenly, terms like ‘lien’ and ‘levy’ pop up, and it becomes important to know how they impact your property and finances.
A tax lien is like a warning—your property stays with you, but the government puts a hold on it until you pay off your debt. It’s a way for them to secure their interest. An IRS bank levy, on the other hand, is much more serious. That’s when the IRS takes what you owe directly from your bank account or other assets.
Whether you’re worried about losing control of your property or having money pulled from your account, understanding these terms is crucial. Read along to get the clarity you need—knowing levy vs lien can make all the difference in protecting your financial health.
What is a Lien?
A lien is a legal claim placed on a person’s property as security for debt. It ensures that if the debt isn’t paid, the creditor has the right to take or sell the property to recover the owed money. While having a lien on your property doesn’t mean you lose it right away, it makes it difficult to sell or refinance until the debt is resolved, as the lien clouds the property’s title.
What is a Levy?
A levy is a legal action that allows authorities, like the IRS, to seize your property or assets to pay off a debt. Unlike a lien, which is more of a warning, a levy means immediate action. The IRS can take money directly from your bank account, garnish your wages, or seize other property to collect what’s owed. A levy can have serious consequences, often hitting without much notice, making it crucial to resolve the issue as quickly as possible.
Difference Between a Levy and a Lien
Understanding the difference between a levy and a lien is important to protect your finances. Plus, you should know how to respond if you face either situation. This section will clearly explain levy vs lien to help you stay informed and take the right action when needed.
| Aspect | Lien | Levy |
|---|---|---|
| Legal Action | A lien is a legal claim filed by the IRS to secure a taxpayer’s property as collateral for unpaid tax debt. It is passive and attaches to assets (current and future). | A levy is an aggressive action where the IRS seizes property to satisfy tax debt. It results in the actual seizure of assets. |
| Effect on Assets | It affects all assets, including future ones. It impacts credit scores and could prevent securing future loans. | Targets specific assets like bank accounts, wages, or property. The impact is immediate and often harsh. |
| Public Exposure of the Action | A lien is a public record, which can harm your reputation and business dealings as others can see the unpaid tax debt. | A levy is not public, but it creates financial hardships by freezing assets and seizing property. |
| Removal of a Lien or Levy | A lien remains until the tax debt is fully resolved. After payment, the IRS issues a tax lien release to clear the claim. | A levy can sometimes be lifted by negotiating with the IRS, but it’s harder to stop once in motion. |
| Attachment and Timing | A lien attaches to all assets and property rights from the date of tax assessment and can apply to property transferred before the assessment. | A levy applies to specific assets at a particular time, like bank accounts or wages, and continues until the debt is paid. |
| Opportunity to Negotiate | Since a lien doesn’t involve immediate asset seizure, taxpayers have more time to negotiate a payment plan before a forced sale. | With a levy, there’s a short window (21 days for bank accounts) to negotiate before the funds are taken, and wage levies take effect immediately. |
| Scope and Continuation | A lien remains on all property until the debt is satisfied or discharged. It covers all assets broadly. | A levy is specific to assets at the time it’s issued, such as bank accounts or wages, and continues until the debt is satisfied. |
How can IRS Liens and Levies Impact You?
Knowing IRS liens and levies is key to protecting your future. This section will help you stay informed, so you can confidently manage any challenges that come your way if you face these situations.
Impact of IRS Lien
A lien can significantly impact various aspects of your financial life, including your assets, credit, business, and bankruptcy proceedings.
- Impact on Assets: A lien attaches to all your current and future assets, remaining in place until the debt is fully settled.
- Credit Score Impact: Once a lien is reported to credit agencies, it can hurt your credit score, making it difficult to obtain loans or credit.
- Business Impact: If you own a business, a lien can affect your business property, including any money owed to your business (accounts receivable).
- After Bankruptcy: Even if you file for bankruptcy, any tax debt covered by a lien stays in place, meaning you’ll still have to resolve it.
Impact of IRS Levy
The consequences of a levy depend on the amount of tax debt you owe. The IRS usually goes for the most straightforward collection method, which may involve:
- Seizing Property: The IRS can take possession of your assets, including real estate or personal items, to satisfy the debt.
- Levies on Receivables (1099): The IRS can collect money you’re currently owed, but not future income.
- Bank Account Levy: The IRS can instruct your bank to freeze your accounts for 21 days, giving them time to recover the money owed. If your accounts are emptied, you might still owe additional amounts.
Read more: How Do I Find Out If I Owe Back Taxes?
When to Take Action Against a Levy?
Knowing when to take action against a levy is important to protect your assets and prevent unnecessary financial strain. Understanding the right steps and timing can make all the difference in resolving the situation effectively.
Notice of Intent to Levy
When the IRS sends a Notice of Intent to Levy, they’re warning you that they plan to seize your assets for unpaid taxes. You have 30 days to respond, during which you can dispute the debt, request a payment plan, or challenge the levy.
Financial Hardship
If the levy makes it impossible to cover basic needs like food or housing, you can ask the IRS to lift it. You must prove that the levy is causing significant hardship to get it removed.
Tax Assessment Errors
If you believe the IRS made a mistake in calculating what you owe, gather your documents and dispute the error with the IRS. Acting quickly can help correct the issue and prevent asset seizure.
When to Take Action Against a Lien?
Knowing when to address a lien can make a big difference in managing your financial situation. Acting at the right time allows you to resolve issues before they escalate, avoiding further complications.
Challenge the Lien
If the lien is wrong or unfair, you have 30 days to request a Collection Due Process (CDP) hearing to dispute it. Don’t miss this deadline if you want to appeal.
Negotiate a Payment Plan
If you need more time to pay, propose a payment plan to the IRS. Make sure you can afford the terms and formalize the agreement to avoid
Further penalties.
Acting promptly in these situations can protect your assets and financial stability.
Also read: Can You Have Multiple IRS Payment Plans?
In Closing!
As we wrap up, it’s clear that understanding the difference between levy and lien is just the beginning. Regularly checking your credit is a proactive step that can alert you to any liens before they become bigger issues. Even if you haven’t received a notice yet, addressing tax concerns early—whether through payment plans or consultations with the IRS—can help you avoid the harsher consequences of a levy or lien.
In cases where a levy is already causing financial stress, seeking relief options such as an Offer in Compromise can ease the burden. State tax laws can also play a significant role, so keeping an eye on both federal and state actions is crucial.
Getting the right professional support from a certified IRS consultant like Michael Sullivan is vital to getting through this process and ensuring your financial future is protected.
Michael Sullivan also offers IRS tax debt settlement help and IRS tax audit defense, providing expert solutions to resolve your tax issues and protect your financial future.
