Are you struggling with debt?
When it comes to tax debt in particular, knowing the difference between tax levy vs lien is vital. They impact you in different ways and mean very different things for your property.
A levy is when the IRS takes your property to settle a debt, whereas a lien is when they hold a claim over it. In either case, there are things you can do to make things easier and experts that can offer additional help.
For a guide on the difference between a tax levy vs lien, and what they mean for you, keep reading.
The Difference Between a Tax Levy and Lien
Many people have heard the terms tax levy and lien before, but are unsure about the details. They often wonder what the differences between the two are. It has to do with your taxes and, specifically, tax debt.
In general, the differences between tax levy vs lien are simple. A levy requires you to forfeit your property in order to pay back outstanding tax debt. A lien is like a delayed claim that you still have time to address.
What is a Levy?
What is a tax levy? If the IRS determines you need to pay a tax debt, they can issue a levy to seize your property.
When people think of property, they often jump straight to the idea of losing their homes. In reality, “property” can apply to any assets worth money. This includes cars, artworks, jewelry, money in savings, or your wages.
However, you don’t have to worry that the IRS will suddenly take all your assets. For a tax levy to pass, the IRS needs to figure out how much tax you owe and send you a bill called a “Notice of Demand for Payment.”
After a certain period of non repayment, the IRS will then have to send you follow-up notices. Before anything gets taken away, you’ll receive a “Final Notice of Intent to Levy.”
This should also come with a “Notice of Your Right to a Hearing.” Both notices should give you at least 30 days prior to the levy taking effect to appeal or settle your debts.
What is a Lien?
A federal tax lien works in a different way than a levy. A levy gives the IRS the right to take your assets until a bill is settled, and a lien is a claim over that property. You can think of it as the IRS saying they don’t have to take it yet, but they reserve the right to do so if necessary.
The reason the IRS sometimes uses liens instead of taking your property is two-fold. First, a lien lets them hold you accountable for paying the debt without excessive fuss. The second reason is it’s often considered a less intrusive and softer approach.
Should you receive a notice demanding you pay a tax debt and fail to pay it, the IRS could file a “Notice of Federal Tax Lien.” This public document lets creditors know that the government has a legal right to claim your property should you fail to pay. As this is an open document, it could show up on and affect your credit report.
The IRS is hoping that, ideally, this will be incentive enough for you to pay your debt. However, you do have the option to appeal it, as explained here.
What Tax Levies and Liens Mean in Practice
Many people think receiving any notice of a tax levy lien from the IRS is the end of the world. While it can induce hardships in some cases, knowing how they’ll affect your life in reality is essential. For example, if you get a levy, the IRS usually doesn’t immediately go after your house or car.
In reality, there are several strategies and options available. Usually, the IRS will choose one that allows them to get the money you owe without too much disruption. Remember, the goal is to get you to pay, not to bankrupt you so you can’t pay in the future.
As such, the IRS may also opt to garnish your wages. This means they take a little bit off the top of your paycheck until your debt is paid in full.
If the levies end up causing you hardship to the point you can’t make ends meet, you can call the IRS to explain. If any levy on your wages or bank causes that problem, the IRS has to release that levy. However, this doesn’t mean you’re off the hook for the debt.
It means that the IRS will work with you to find alternative arrangements to get your debt to them repaid. They can even set up a flexible payment plan to let you pay without destroying your finances.
What Liens Mean in Practice
A lien’s impact on your life can be tricky. If your debt is severe, the lien could cover all of your property and assets. This means the government gets the first crack over any other creditor or bank should you default on your loans or be unable to pay.
Having a lien can make it hard to get a car loan or a mortgage. This is because creditors don’t want to take the risk the IRS will claim the money you owe. The good news is, the IRS offers a variety of ways to get rid of a lien.
The easiest is to pay off the debt. Within 30 days of doing so, the IRS will drop all claims.
You can also get specific properties discharged or subordinated from a lien. Discharged properties get all lien claims dropped. Subordinated properties let creditors cut in front of the IRS.
This can make getting a mortgage easier, so it’s worth talking to the IRS about. The final major option is a withdrawal, which keeps you on the hook but gets rid of the public notice.
Knowing about Tax Levy vs Lien
Now you know the difference between tax levy vs lien. A tax levy allows the IRS to seize your property to help you pay a tax debt. A federal lien gives the IRS the first claim over your properties against other creditors should you default or be unable to pay.Both can impact your life in serious ways, so knowing the difference is important. It also helps to have experts who can guide you in navigating negotiations with the IRS. At Fiscal Solutions Group, we are some of the best in the business, so contact us today to get the help you need.
