What is the difference between an IRS tax levy, and an IRS tax lien?

Tax liens and tax levies are staples of the Internal Revenue Service's tax debt collection enforcement machinery. They are two of the very common methods the IRS uses to get the money it's owed if a taxpayer doesn't write a check voluntarily, or for that matter, quickly enough. 

Tax Liens

A tax lien first arises when a person who owes tax fails to pay the tax after an official "demand" by the Internal Revenue Service. The lien is sometimes referred to as a "secret lien" because even though at first there is no public record, it attaches to all of the taxpayers' property and rights to property - both real estate and personal property - as of the date the tax is assessed. The consequences of this is that if taxes are assessed against you on July 1st and you give the property a third party as a gift on July 2nd, the tax lien continues to attach to that property even though you had no knowledge of the existence of the tax lien and even though the person who received the property didn't know that the tax lien had arisen. This occurs frequently in divorces when one spouse who owes taxes to the IRS transfers ownership of property to the other spouse as part of a marital dissolution. Even though neither spouse is aware of the tax lien, it continues to attach to the property in the hands of the spouse who didn't have any tax liability, and the IRS can collect the taxes owed by seizing and selling the property. 

Certain third parties are protected from the impact of the secret tax lien. These are generally people who gave "fair value" for the property received. For example, if your home was subject to a secret IRS tax lien and you sold it to a third party for its fair market value, the IRS could not go after your home once it had been transferred to someone else. To be clear, this rule would not be of any help if the person who received the home paid less than its actual value. 

When most taxpayers or tax attorneys refer to a tax lien, they are actually referring to a "Notice of Federal Tax Lien" (NTFL). A Notice of Federal Tax Lien is a document filed in a public place such as a County Recorder's Office or with the Secretary of State. It is a notice to the world that you owe taxes. A Notice of Federal Tax Lien generally lists the amount of the taxes owed, the type of tax, and even the years for which taxes are owed. It also lists the date the tax was assessed. It is worth noting that the Notice of Federal Tax Lien is a static document. Therefore, if you make payments on your tax liability, the Notice of Federal Tax Lien will continue to list the same amount due. Likewise, as interest and penalties accrue it will not be updated to reflect the additional amounts due. That is why the amount listed in the NFTL is not a true reflection of your tax liabilities. 

The Notice of Federal Tax Lien will be picked up by the various credit reporting agencies and will cause significant credit problems. If you own real property and try to sell it, the IRS will be paid the equity in your property. The tax lien does not, however, take any money out of your bank account. 

Tax Levies

A tax levy is not available for the general public to see and does not by itself affect your credit rating or prevent you from selling your property. However, if the IRS serves a tax levy on your bank, then it is required to send all of your money to the IRS. The bank can not immediately send your funds to the IRS, however. Instead, Internal Revenue Code Section 6332(c), provides that the bank must hold onto the funds for 21 calendar days. You can expect that the bank will notify you of its receipt of the tax levy. However, this may take a few days until after the bank receives it and that 21-day clock continues to tick. The 21 day period is extremely important because it gives you an opportunity to negotiate with the Internal Revenue Service to release the tax levy before the bank sends the funds. While it can be difficult to get the IRS to agree to release the tax levy, an experienced tax litigation attorney can sometimes get this accomplished, but it will depend on your overall situation including such factors as: 

  • How much money is in the bank
  • The value of your other assets
  • The amount of your income and expenses
  • The total amount of your tax bill
  • Whether you have been cooperating with the IRS by responding to their inquiries 
Don't expect to get rapid notification from the IRS that they have sent a tax levy. The internal operating procedures of the IRS known as the Internal Revenue Manual specifically instruct its employees to delay sending a copy of the tax levy to the taxpayer. See IRM 5.11.2.2.7.

A tax levy sent to the bank is a "one shot" tax levy. It only attaches to the funds in your account at the minute tax levy is received. A tax levy on wages, commissions, or other similar payments is a continuing levy. That means that unless the IRS agrees to release the levy, your employer will continue to send the bulk of your paycheck to the IRS until your entire tax liability has been satisfied. 

If the IRS sends a tax levy to your employer, it is required to send your paycheck to the IRS minus a very small amount which is exempt. There is no 21-day holding period. The tax levy is effective with your very first paycheck after the employer receives the tax levy. Since there is no holding period, if you find out the IRS has served a tax levy on your employer, it is extremely important to engage tax counsel to begin immediate negotiations with your employer BEFORE your next paycheck. Remember, once your funds have been forwarded to the IRS either by the bank or your employer, you are not getting them back. 

If you would like to see how little of your paycheck is exempt from an IRS tax levy, take a look at IRS Publication 1494. For example, if you are single and have no dependents, then the IRS will let you keep $866.67 per month! 

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