Question: What is the difference between an IRS levy vs. lien?

Question: Want to know the difference between a levy vs. lien?

Answer:  If a business or individual is liable for back taxes and cannot pay after the IRS issues notice and demand for payment, then a lien in favor of the United States exists upon all property and rights to property belonging to the business or individual.  This lien is referred to as the “secret lien” because it exits between the taxpayer and the IRS without the filing of any public documents.

NJ Tax attorney levy vs. lienTo protect its interest against other creditors, the IRS will go to the county courthouse where the taxpayer resides or has property and will file a Notice of Federal Tax Lien (NFTL)After the Notice of Federal Tax Lien is filed, taxpayers have the right to appeal the NFTL during the 30-day period beginning with the mailing or delivery of the notification.

When the IRS files its tax lien in the county court, it can be devastating for people and businesses who must maintain good credit.  In some cases, it can spell the end for a businesses that relies on financing or individuals who need good credit such as stock brokers, bankers, and people looking for jobs.

Notice, that I have not discussed the “taking” of property.  While the Notice of Federal Tax Lien protects the government’s interest in taxes owed, it does not bring in money. The IRS levy is how the government collects back taxes.  A tax levy, also known, as seizure, garnishment or bank levy, is the taking of your property to satisfy a tax debt. When the IRS levies, there is a transfer of ownership of your property to the IRS.

There are prerequisites that the IRS must follow before taking the taxpayer’s property.  First, the IRS must issue notice and demand for the payment taxes owed.  Second, the taxpayer must neglect or refuse to pay the tax within 10 days of the notice and demand.  Finally, the IRS must provide written notification of the right to a hearing 30 days before the levy is made on the taxpayer’s property.

The key difference with the procedural requirements between an IRS lien and an IRS levy is that the IRS must provide the right to a hearing 30 days before levy action is taken whereas the taxpayer has the right to hearing after the IRS files a lien.  Defending against an IRS lien can be difficult because once filed, the damage is done.  The IRS’s perspective on a tax lien is that it must protect its interest against other creditors at the risk of the taxpayer’s career or business.  Even though there are administrative remedies available to have the lien withdrawn, the key is to be proactive prior to the IRS filing the tax lien.  The IRS’s policy is to file a lien when the taxpayer owes more than $10,000.00 in back taxes.  There is no threshold amount for the IRS to levy against a taxpayer’s assets.

More on Levy vs. Lien

While both an IRS tax lien and an IRS levy are devastating, the key difference is the following: the tax lien is a security interest similar to a mortgage, whereas a levy is the taking of property similar to a foreclosure. The government protects itself against other creditors by filing a tax lien whereas the tax levy generates the proceeds against which the lien may secure.

If you need help with an IRS levy or lien, feel free to contact us.

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