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Key Differences between Tax Lien and Tax Levy
Tax Lien vs. Tax Levy: What is the Difference?
Tax agencies use various legal tools to collect on tax debt owed to them. Internal Revenue Service (IRS), Franchise Tax Board (FTB), California Department of Tax and Fee Administration (CDTFA) deploy legal instrument like tax liens and tax levies. For individuals and businesses facing unpaid taxes, understanding the key differences between a tax lien and a tax levy is crucial to managing financial obligations and protecting assets.
What is a Tax Lien?
A tax lien is a legal claim the IRS or other taxing agencies place on a taxpayer’s property to secure payment of a tax debt. It acts as a safeguard for the government, ensuring that the IRS has a legal right to the taxpayer’s assets if the debt remains unpaid. According to the IRS, a lien is not a direct seizure of property (this is the key difference) but rather a public notice to creditors that the government has a claim on the taxpayer’s assets, including real estate, personal property, vehicles, and business assets.
- How It Works: A tax lien is typically filed after the IRS assesses the tax debt, sends a Notice and Demand for Payment, and the taxpayer fails to pay or make arrangements to settle the debt. The IRS files a Notice of Federal Tax Lien (NFTL), which is recorded publicly, affecting the taxpayer’s credit and ability to sell or transfer property.
- Impact: A tax lien can attach to all current and future assets, impact credit scores, and persist even after bankruptcy in some cases. It is released within 30 days after the tax debt is fully paid or settled.
What is a Tax Levy?
A tax levy, on the other hand, is an immediate action (this is the key difference between tax levy vs tax lien) where the IRS, FTB, CDTFA or EDD legally seizes a taxpayer’s property to satisfy a tax debt. Unlike a lien, which secures the government’s interest, a levy involves the actual physical taking of assets, such as wages, bank accounts, or physical property like vehicles or real estate.
- How It Works: The IRS initiates a tax levy after meeting four requirements: assessing the tax, sending a Notice and Demand for Payment, issuing a Final Notice of Intent to Levy (at least 30 days before the levy), and determining that a tax levy is the appropriate action. The notice may be delivered in person, left at the taxpayer’s home or business, or sent via certified mail.
- Impact: A tax levy can target wages, bank accounts, rental income, dividends, accounts receivable, and even state tax refunds. The IRS can also seize tangible property, such as a car or boat, to sell and cover the debt.
- Release: A tax levy release does not exempt the taxpayer from paying the remaining tax balance. The IRS will work with the taxpayer to establish a payment plan or other resolution to settle the debt.
Key Differences Between a Tax Lien and a Tax Levy
Understanding the distinctions between a tax lien and a tax levy is critical for taxpayers facing IRS action.
| Aspect | Tax Lien | Tax Levy |
|---|---|---|
| Definition | A legal claim against property to secure future payment of a tax debt. | A legal seizure of property to satisfy a tax debt immediately. |
| Action | Does not take property; it establishes the IRS’s right to the property. | Actively takes property immediately (e.g., wages, bank accounts, or physical assets). |
| Notice | Notice of Federal Tax Lien filed publicly after assessment and non-payment. | Final Notice of Intent to Levy sent at least 30 days before seizure. |
| Impact on Assets | Attaches to any and all assets, affecting credit and ability to sell property. | Directly removes assets, such as freezing bank accounts or garnishing wages. |
| Duration | Released within 30 days after debt is paid or settled. | Released after tax seizure, but taxpayer must still address remaining debt. |
| Legal Authority | Authorized under Internal Revenue Code (IRC) Section 6321. | Authorized under IRC Section 6331. |
Impacts on Taxpayers: A Comparative Analysis
Both tax liens and levies have significant consequences for taxpayers, but their impacts differ in scope and severity:
- Credit and Financial Standing:
- A tax lien severely impacts credit scores because it is a public record, making it difficult to obtain loans, mortgages, or credit. It can also hinder business operations by attaching to business assets.
- A tax levy does not directly affect credit scores since it is not a public filing, but the seizure of funds (e.g., bank accounts or wages) can lead to financial hardship, missed payments, and indirect credit damage.
- Asset Vulnerability:
- A lien affects all current and future assets, meaning even property acquired after the lien is filed becomes subject to the IRS’s claim.
- A levy targets specific assets at the time of seizure, such as a bank account balance on the day of the levy or a portion of wages through garnishment.
Strategies to Address Tax Liens and Levies
Taxpayers facing a lien or levy have several options to mitigate the impact and resolve their tax debt.
- Payment Plans:
- The IRS offers installment agreements for taxpayers who cannot pay their debt in full. This can prevent a lien from escalating to a levy or lead to the release of a lien once the debt is settled.
- Offer in Compromise (OIC):
- An OIC allows taxpayers to settle their debt for less than the full amount owed if they can demonstrate financial hardship. This can lead to the release of a lien or stop a levy.
- Lien Withdrawal or Subordination:
- A lien withdrawal removes the public notice, improving credit, while subordination allows other creditors to take priority, facilitating loans or refinancing.
- Example: A taxpayer selling a property with a lien can request subordination to allow the sale to proceed, using the proceeds to pay the IRS.
- Levy Release:
- A levy can be released if it causes immediate economic hardship (e.g., inability to pay for basic living expenses). The IRS will then work with the taxpayer to establish a payment plan.
- Centralized Lien Operation (800-913-6050) can assist with levy releases or lien payoffs.
- Legal Representation:
- Engaging a tax lawyer can ensure proper navigation of IRS procedures, negotiation of settlements, and protection of taxpayer rights, especially during appeals or hearings to preempt surprise tax levy or tax lien.
Tax Lien versus Tax Levy in Action
Consider a hypothetical taxpayer, John, who owes $175,000 in back taxes. The IRS assesses the tax debt in January 2025 and sends a Notice and Demand for Payment. John fails to respond, and by March 2025, the IRS files a Notice of Federal Tax Lien, attaching to his home and car. His credit score drops, and he struggles to refinance his mortgage or obtain a good rate to finance purchase of a new car.
In May 2025, after continued non-payment, the IRS sends a Final Notice of Intent to Levy. On June 30, 2025, the IRS tax levies John’s bank account, seizing $10,000, and garnishes 15% of his wages. As seen here, tax levies have immediate and sudden impact whereas tax liens will have potential future financial effect.
Tax liens and levies are powerful tools in the FTB, EDD, DTFA and IRS’s arsenal to collect unpaid taxes, but they differ significantly in their approach and impact. A tax lien secures the government’s interest in a taxpayer’s property, creating long-term financial challenges, while a tax levy involves the immediate seizure of assets, causing acute financial distress. Call us if you have further questions.