I have taxpayers call or come into my office and tell me that the IRS liened my bank account or levied my house. It can all get very confusing and wanted to take a few moments to discuss the difference between a levy and a lien. Why is it important? First, the IRS must follow different rules when filing a Notice of Federal Tax Lien vs. before issuing a levy or garnishment. Second, the rules for effectively resolving a lien vs. a levy are different. If we don’t know what we’re dealing with, we’re likely not going to have success in addressing it successfully.
THE IRS LIEN
The IRS’s website defines an IRS Lien as “the government’s legal claim against your property when you neglect or fail to pay your tax debt. The Lien protects the government’s interest in all your property, including real estate, personal property and financial assets”. When the IRS files a Notice of Federal Tax Lien, they are not taking anything but filing a claim against those assets to show the government has an interest in them. The NFTL is filed publicly so that all potential creditors are aware of the government’s claim.
The lien commonly impacts the taxpayer in two ways –
- If the taxpayer own’s an asset such as real estate, the NFTL will make third parties aware of the governments interest in that asset and the proceeds of the sale of that asset.
- While an NFTL does not directly impact the credit score of the taxpayer, the NFTL can make it difficult to obtain financing.
The IRS will notify the taxpayer of the NFTL filing, but only AFTER the NFTL is filed. Avoiding an NFTL filing is often easier than removing one. For example, the government will not file a lien if a Taxpayer sets up a direct debit installment agreement with an assessed balance of $50k or less prior to the filing, but the option to have one withdrawn is for tax debts of $25k or less as illustrated below. I have also been able to help taxpayers avoid a filing when the filing would not only be detrimental to the taxpayer but also to the IRS. For example, if the filing would cause loss of employment and undermine the taxpayer’s ability to pay back the IRS.
Once you have a lien, there are four ways to remove the lien or allow another creditor ahead of the IRS:
- Release of the Lien – The Taxpayer no longer owes the tax. Some examples are when the taxpayer pays off the tax debt or the 10 year Statute of Limitations the IRS has to collect a tax debt expires.
- Withdrawal of the Lien – The Taxpayer still owes the tax but the NFTL has been removed from public notice. For example, the taxpayer sets up a DDIA for under $25k and makes three payments.
- Discharge of the Lien – The lien is removed from a specific asset. Most typically we see this with the sale of real estate.
- Subordination – The IRS allows a lender to move in front of the IRS. Most commonly occurs when the IRS benefits from an event. Example, taxpayer enters into a Cash Out Refi and the cash out funds go to the IRS.
Remember that the IRS understands that the NFTL it creates pain to the taxpayer. Communicating this pain will not get the lien released. They typically will only remove it if it is their best interest.
THE IRS LEVY
The IRS website defines the IRS Levy as “An IRS Levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money from your bank or other financial accounts, seize and sell your vehicle(s), real estate and other personal property”. This is very different than a Lien which is a claim on a taxpayer’s assets to protect the government’s interest.
Unlike the Lien where the government notifies the taxpayer after the filing of the lien, with a Levy, the taxpayer gets notification with a notice that is title “Final Notice of Intent to Levy” which also gives the taxpayer notification of your CDP rights and right to a hearing. If the taxpayer fails to respond to the notice in the 30 days as required by the notice, the IRS can legally levy the taxpayer.
Getting those CDP rights are incredibly powerful. In addition to giving the taxpayer rights to have their case heard before the tax court, if the request for a hearing is filed timely (IRS Form 12153), the IRS will typically not levy the taxpayer while the appeal is pending and it will give the taxpayer the right to go before IRS appeals and plead their case on why they have a better solution to resolve the tax debt than to be levied. Not only is this a right, but the taxpayer is required to provide an alternative resolution which may include an installment agreement, an Offer in Compromise, or be classified as Currently Not Collectibel.
While the steps to remove an IRS Levy may vary, here are some typical steps:
- Contact the IRS to let them know you want to resolve the problem.
- The IRS will require you get in compliance. Typically, this means that all outstanding returns need to be filed.
- Request a reasonable amount of time both get in compliance. The worst thing a taxpayer can do is to not meet the promise made to the IRS. If you have several years of complicated tax returns to get completed, don’t promise to have them in a week unless you can do it.
- You should request an alternative resolution with the IRS such as an Offer In Compromise, an Installment agreement, or to be classified as Currently Not Collectible. This may require the preparation of a Form 433 (Collection Information Statement) and/or other forms.
- If the levy has created a harm to the Health or Welfare of your family, the IRS may be willing to release all or part of the levy. You’ll need to ask and explain why the levy has created harm. For example, you are unable to pay your rent and/or feed your family. Be prepared to give details.
If you need help with an IRS Lien or other IRS Collection issue, I’d be happy to talk with you. You can set up a FREE consultation at https://jablonskyandassociates.com/contact/ to see if we would be a good fit to work together.