The IRS has two ways to collect back taxes: a Federal tax lien and tax levy. A tax lien is different from an IRS levy – the lien does not result in the IRS taking your property from you. That is done by levy.
You have rights to defend the filing of a lien, and prevent the issuance of a levy. To be able to assert your rights and protect your property, it is important to understand and recognize the tools the IRS uses.
Here is what you need to know about the IRS tax lien and IRS tax levy:
IRS TAX LIEN
An IRS tax lien protects and secures the IRS’s rights to your property. The lien attaches to property you own when it is filed, and property you purchase later. A Federal tax lien most commonly impacts real estate.
If you own a house, and the IRS files a tax lien against you, the lien would give the IRS an interest your home similar to that of your mortgage company.
Example: Your house is worth $100,000, and you have a mortgage of $75,000 on it. There is $25,000 of equity in your house. Before the IRS filed its tax lien, that equity would be yours. Now that the lien has been filed, the equity belongs to the IRS. If you want to sell your house, the IRS gets your equity at closing, not you.
The IRS usually files its Federal tax lien with county recorder or clerk of courts in the county where you residethe property is located. For the tax lien to affect real estate, it must be filed in the county where the property is located. It would then encumber all of your real estate in that county. A federal tax lien does not name the property it attaches to – it automatically encumbers all your real estate in the county it is filed and all of your other personal property.
If the IRS files a lien against you, you have a 30 day window to file an administrative appeal to request reconsideration of the filing. This is called a collection due process appeal.
The lien expires when the IRS statute of limitations on collection expires – in most cases, 10 years.
IRS TAX LEVY
The purpose of an IRS levy is to take your property. An IRS levy is the same as a seizure, or garnishment. The IRS can levy on your wages, bank accounts, subcontractor pay, accounts receivable, even retirement accounts. The IRS can seize your house, car or your business equipment (although those are rare). For most people, it is the levy, not the lien, that hurts.
There are only a few things the IRS cannot levy – these “exemptions” are listed in Internal Revenue Code 6334. The exemptions you can claim include the right to keep unemployment benefits, workers compensation, most household goods and some tools of your trade from the IRS.
Before the IRS can levy on your property, they must first send you a Final Notice of Intent to Levy. This is your notice of that the IRS intends to start enforcement against you. After you receive the Final Notice of Intent to Levy, you have 30 days to file an appeal of the proposed IRS collection action. If you file the appeal, the IRS is prevented from taking action until your hearing is completed. The purpose of the hearing is to reach a resoluton to levy action before it occurs – offer in compromise, installment agreement, uncollectible, for example.
The IRS does not need to file a Federal tax lien as a prerequisite to levying your wages, bank accounts, etc. – just the Final Notice of Intent to Levy.
In the rare cases of seizure of a house, the IRS must get court approval first. To do this, the Department of Justice will usually file a lawsuit against you in Federal District Court seeking approval to foreclose and take your house. Again, this is not a preference of the government.
The Federal tax lien and tax levy gives the IRS different rights against you – the lien as to security in your property, the levy to take it. Together or apart, the lien and levy are powerful tools for the IRS.