Tax Lien vs. Tax Levy: Examining the Differences

Tax time- know the difference between Tax lien and Tax Levy

Filing a tax return must be a priority for every taxpayer, as the October deadline for FY 2015-16 is around the corner. That’s because failure to file a return can give the almighty IRS the right to use the several provisions it has in its arsenal against defaulters. In fact, if caught on the wrong foot after a Taxpayer Delinquency Investigation, the defaulter may have to serve up to 1 year behind bars for each year they did not file a return (maximum period being 5 years), and/or will be required to pay a fine. The upper capping for the fine is defined as $250,000 for individuals and $500,000 for corporations. As far as collection is concerned, “tax lien” and “tax levy” are two of the most powerful tools the IRS may use against defaulters.

Shedding more light on the subject, in this post, we provide an overview of both, along with their respective repercussions. Let’s begin.

Tax Lien

The IRS can place a claim over a defaulter’s property if they fail to pay taxes by the deadline. If you owe money (in unpaid taxes) to the Fed, the IRS will first assess the outstanding liability and will send a payment reminder after every 30 days; and as relentless as the tax collection authority can be, they can pursue you for no less than ten years. If defaulters fail to heed to these payment demands or don’t appeal against these payment demands within nine months (from the date the tax was assessed),  the IRS will send the Intent to Levy notice. The letter notifies IRS’ intention to seize the defaulter’s property.  If this was not enough, the tax authority also has right to seize any property that the defaulter may have acquired after the lien was placed.

Unfortunately, this is not the end of woes for defaulters, as the IRS may levy their bank accounts and garnish wages. The IRS may also have an interest in the defaulter’s house, and can demand the equity (the difference between the house’s worth and the mortgage on it).

Must Read: How to Avoid Wage Garnishments

Aftermath of a Tax Lien

  • The IRS notice will warn all the current and prospective creditors, thereby making it difficult for the receiver to obtain any type of credit.
  • A tax lien will reflect as a negative on the defaulter’s credit report.
  • The information about the lien is saved in public domain, and can make it difficult for the defaulter to secure work and business if their employers/suppliers/customers find out about the delinquency.
  • Getting a lien placed on their property can be devastating for defaulters as well as their dependants.

The Way Ahead

Good news is there are still some measures defaulters can take to avoid the possible outcomes of a tax lien.


You can negotiate with the IRS to subordinate the lien to a new borrower who’ll have the first right on funds received from any future sale. The arrangement also makes it easier for defaulters to secure loans

Offer in Compromise

You can negotiate with the tax authority to reach a settlement wherein you agree to pay a lesser amount than what you owe. Read more

Certificate of Discharge

You can talk to the IRS to remove lien on one of your properties; however, you may have to part with a portion of the proceedings you receive when you sell the property.

Tax levy

If you think getting a tax lien is bad; wait until we introduce “tax levy”. A tax lien is a claim by the IRS on a defaulter’s property, and a tax levy is the next step to realizing this claim. The process involves seizing the defaulter’s property, and the IRS can even send notices to their bank to divert all the money from their account to IRS’ accounts. Just as defaulters think the worst is over, the paycheck can come across as a shock, as the taxation authority can even claim a lien on their paycheck. The process of tax levy comes into enforcement if the defaulter fails to respond to the Final Notice of Intent to Levy within 30 days.

Aftermath of a Tax Levy

Tax levy can be devastating for defaulters and in worst cases, the defaulters may even be forced to file for bankruptcy. In addition to these issues, those who have a tax levy placed on them may also face other problems.

  • The IRS can’t report first-time delinquent payments to credit bureaus; however, additional wage levies will reflect on the defaulter’s credit score
  • A levy can make it difficult for defaulters to meet payment commitments such as credit card bills, and mortgages and can further damage their credit score

The Way Ahead

When it comes to taxation issues, adopting a nip in the bud approach is the safest way out. As soon as they get the Final Notice of Intent to Levy, the defaulters must resort to the following measures:

  • File an appeal: The IRS can’t enforce the levy till the hearing is complete. You can use this time to reach at a payment arrangement with the tax authority. Read More
  • Request a payment plan: Get into an installment agreement with IRS that allows defaulters to pay back the due amount within a maximum period of three years
  • Prove disruption to essentials: Prove that the levy will cause financial hardships for you, and may question your sustenance. If you’re able to prove this, the IRS will pause all collection activities until your financial standing improves.

Last Few Words

Tax lien and levy are two of the most powerful tax collection devices the IRS can use against you to recover pending payments. That said, you still have your rights as a taxpayer. For instance, in case of seizure of a house, the taxation authority has to first get a court approval. Further, the IRS cannot levy unemployment benefits, workers compensation, household goods and some business articles. You can leverage this and other exemptions provided by the law, if you chose an experienced IRS attorney to handle the issue. That’s where we step in. The Law Offices of Nick Nemeth, with an in-house team of experienced IRS lawyers, can help find your way out of every IRS tax related issue. To discuss your case, call us at (972) 426-2553.

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