IRS Lien vs Levy

By Steven A Leahy

On the IRS Radio Hour I often talk about the way the IRS works. The most important aspect of how the IRS works goes directly to how the IRS can collect assessed taxes from taxpayers, outside of voluntary agreements, like installment agreements, offers-in-compromise, currently not collectible, and bankruptcy. When a taxpayer ignores, or otherwise fails to negotiate a work out with the IRS, the IRS may take some drastic actions. The most dramatic action is a levy. This article will clear up IRS Lien vs Levy.

Many taxpayers confuse a levy and a lien. A federal tax lien is the federal government’s legal claim against a taxpayer’s property when a taxpayer neglects or fails to pay a tax debt. The IRS files a public document, the Notice of Federal Tax Lien, with the county recorder to alert the taxpayer’s creditors that the federal government has a legal right to the taxpayer’s property. A lien does not result in seizure of any of the taxpayer’s property.

A federal levy, on the other hand, is a legal seizure of a taxpayer’s property to satisfy a tax debt. If a taxpayer fails to pay the assessed tax, or make satisfactory arrangements to settle the debt, the IRS may seize any type of asset, real or personal.

There is a three-pronged procedure in place the IRS must follow in order to justify a levy. First, after the IRS assesses a tax, they must send a Notice and Demand For Payment. Second, the taxpayer must neglect or refuse to pay the tax. Finally, the IRS must send the taxpayer a Final Notice of Intent to Levy and Notice of Your Right to A Hearing. The Taxpayer has 30 days from the date of that notice to request a Collection Due Process hearing with the Office of Appeals.

Once the IRS fulfills their obligations under the three-pronged procedure, they can seize any property the taxpayer is holding (including, cars, boats, houses), or any property someone else is holding (wages, retirement accounts, bank accounts, rental income, accounts receivables, cash value of life insurance or commissions).

In my practice I have seen levies against rental income – the revenue officer actually visited the taxpayer’s tenants each month to collect the rent before the taxpayer could collect; levies against insurance payments due a doctor – the IRS ordered all insurance carriers to send all payments to the IRS; levies on commissions – the IRS contacted the contract employer and levied, took, all commissions the taxpayer was due. A Taxpayer should never under-estimate the creativity of an IRS Revenue Officer looking to levy assets to collect on an IRS obligation.

The two most common levies involve bank accounts and wages; low hanging fruit. Remember, a bank must report any interest paid of at least $10.00 with form 1099-int. So, the IRS knows where most every taxpayer banks. Once a bank receives a Notice of Levy, the taxpayer’s account is frozen – the bank must hold any money in the account, up to the amount you owe, for twenty-one days. After twenty-one days the bank must send the money, plus interest, to the IRS. Any money deposited in the account after the date of levy, is NOT included in the levy. However, the IRS can issue more than one levy on the same account. I have seen accounts levied each week for months on end.

Finally, the levy most taxpayer’s fear is the wage levy. A wage levy is often referred to as a wage garnishment. The IRS issues a wage levy to the taxpayer’s employer, and the employer is obligated to send all net income, less exemptions, to the IRS CONTINUOUSLY. The more a taxpayer makes, the more the IRS will take. Generally, the exemptions are calculated by determining the standard deduction and the amount deductible for exemptions on an income tax return for the year the levy is served, divided by Fifty-two. The exempt income is designed to provide minimal sustenance – not enough to pay your expense. To do that, the taxpayer must work out an agreement with the IRS.

If you are facing IRS Collection Efforts, you should work with a local law firm that understands the IRS Collection procedures and will work to get you the best deal possible. You should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.