One of the most common questions I hear is about Tax Liens or Tax Levies. Since they sound so similar a lot of folks may think they have one, when they really have the other. Though it is possible to have both. Or multiple issues with either or both.
So now that I have you totally confused, lets cover the basics:
A tax lien is a notice issued by the IRS and filed with your county of residence (or where you may own real property). It is a legal claim on your property or assets. It is a public notice to advise creditors that money is owed to the IRS. Courts use lien filings to determine creditor priority if a lawsuit arises. The tax lien is used as security to ensure the IRS’ claim to the money for the tax debt.
The tax lien will remain in place until the balance is paid in full, the lien is removed by the IRS, the lien expires (usually 10 years after filing) and is not re-filed, or until another permanent resolution on the balance is accepted by the IRS and paid in full.
A tax lien can potentially be subordinated (allowing the other lien to be handled first, legally) to another lien. This is particularly important if you are trying to refinance your home, or sell real property. You have to request that the IRS subordinate their lien. The IRS will generally consider subordination in situations where doing so will allow you to repay or make a payment on your back liability. This payment will usually become a requirement to the subordination. In some instances, the IRS will even withdraw the lien, again, usually if it means that you can repay the debt sooner.
What you really need to know about a lien:
- It can hurt your credit since it is a public notice of debt
- It stays in place until you deal with the underlying debt to the IRS
- The IRS can issue a levy even if a lien is already in place (and often will unless alternate payment arrangements are made)
- Since the tax lien is public you may receive advertisements or commercial contacts offering to assist you with the lien or your IRS debt resolution- some of these may even look like they are from the IRS. Use common sense and hire a professional if you need the assistance.
A levy is a “legal seizure of your property to satisfy a tax debt.” The levy captures funds to satisfy the tax debt, rather than to secure the IRS’ interest. A tax levy can affect such things as bank accounts, wages, retirement income, social security, pensions, other investment or retirement accounts, 1099 income sources, or accounts receivable. A levy does not happen immediately; meaning that the IRS has to notify you in advance that you owe them, give you a deadline to pay, and notify you that they intend to collect on the debt before they issue a levy.
There are different types of levies that can be issued. A bank levy is issued directly to a banking institution. In general, the bank levy instructs the bank to freeze all money in your accounts (which could mean you are a signatory, authorized user, or account owner) at the time the levy is processed and hold it for 21 days before sending it to the IRS. The 21 day holding period is to ensure that you have an opportunity to otherwise prove you have paid the balance owed or to prove with a complete financial analysis and supporting documentation that for the IRS to capture these funds would cause an IMMEDIATE and extreme financial hardship. This doesn’t mean that you will incur late fees on bills, or that you will miss paying your mortgage one month. It has to be something immediate and urgent, and will also result in an alternate resolution arrangement with the IRS. (Where you are agreeing to make monthly payments on your back liabilities, or where the IRS agrees you do not presently have the ability to make payments).
A wage or income levy can be issued to any income source. This type of levy is meant to be an ongoing capture of funds. The IRS does understand that most of us cannot live with no money, and so the IRS have a chart that exempts an amount of your take-home or net pay from the wage levy. This chart is based on your filing status, how many dependents you can claim on the current year tax return, and how often you are paid. The IRS attaches this chart to the levy notice it sends to your income source/employer.
The IRS will also levy any other refunds or payments that you may be due. This can include state tax refunds or the Alaska Permanent Fund. And, obviously, it includes all refunds owed to you by the IRS.
Levied funds are applied to your back balance. The IRS does not charge a processing fee for the levy, but your bank or financial institution might charge you for having processed the levy.
What you really need to know about a levy:
- Take IRS notices seriously- they mean it when they say they will issue a levy.
- The wage or income levy will remain in place until the balance owed on the levy notice is paid in full or until the IRS releases the levy (which requires other arrangements be made).
- The bank levy should not permanently affect your ability to use that account, but will remove all funds in the account when the levy is processed- watch out for bounced checks or failed electronic payments.
- It takes time to get the IRS to release a levy, sometimes weeks.
Finally, the IRS may begin the process to seize assets. This can include a car, boat, house, business, rental property, or any other tangible assets you may have. If you have gotten to this stage with the IRS, it is very likely that you have failed to respond to multiple letters, lien filings, levies, and demands for payment and/or information by IRS Agents. Seizure is a lengthy process and no the preferred method for satisfying the IRS liabilities. If the IRS seizes assets, they will liquidate these assets and credit your account with any net proceeds from the liquidation.
Other things to keep in mind:
- Keep your address up to date with the IRS- if they need to contact you they will do so at your last known address
- Make sure you know what you need to do when you get a notice- read it carefully and respond as requested.
- Hire a professional to assist you whenever you need it. You may need to speak to multiple professionals to find out who can best assist you- a tax preparer, an accountant, an Enrolled Agent, a Tax Attorney, a CPA, etc. Some situations may require those professionals to work together (such as preparing missing tax returns, and dealing with the IRS on a levy issue).
- Make arrangements to handle the back liability before the IRS starts “helping” you along with those arrangements.