Tax Lien vs. Tax Levy: What’s the Difference and How Does It Affect You

When you don’t pay taxes, you might think the IRS just sends letters. But when it comes to unpaid taxes, the IRS uses two powerful tools, such as tax liens and tax levies, and they’re not the same thing. When you see terms like “tax lien” and “tax levy” on an IRS notice, it’s easy to panic without knowing what they really mean.

In this blog, we will explain tax liens and tax levies, what each one means, how they work, and what steps you can take to prevent or resolve them before they spiral out of control.

What Is a Tax Lien?

A tax lien is basically a legal claim the IRS puts on your property when you owe taxes and don’t pay. It is a public notice that says, “The government has a right to your property until you pay your taxes.” It doesn’t mean they’ve taken your property, not yet. It just means they’ve secured their interest in what you own, kind of like a bank holding your car title until your loan’s paid off. A federal tax lien happens when:

1. The IRS figures out how much you owe (called “assessing the tax”).
2. You don’t pay taxes after several IRS notices.
3. They send you a Notice and Demand for Payment.
4. You still don’t pay on time.

Once that happens, the IRS automatically gets a lien on your property, like a house, car, or even future property. That’s why understanding federal tax lien and levy matters so much. A lien warns you, while a levy takes from you.

How a Federal Tax Lien Works: The IRS Process

The IRS follows a clear process. Here’s a simple federal tax lien explanation:

1. Assessment: The IRS determines the exact amount you owe after your return is filed or adjusted.
2. Notice and Demand: You’ll receive a series of IRS collection notices reminding you to pay. These letters escalate in urgency.
3. Failure to Pay: If you ignore it, the IRS’s claim becomes automatic.
4. Notice of Federal Tax Lien (NFTL): This is the public record that tells lenders and credit agencies you owe money to the government.

This step is the official start of the IRS lien and levy process. A lien doesn’t mean you lose anything right away. But the NFTL stays in the background checks, making it difficult to sell any property.

What Property Does a Tax Lien Affect?

A tax lien attaches to everything you own now and everything you acquire while the lien is active. That includes:

• Real estate (your home, land, or investment property).
• Cars, boats, or other vehicles.
• Bank accounts (though the money stays there until a levy hits).
• Business assets or accounts receivable.
• Future property, even an inheritance.

If you try to sell your home while a lien exists, the IRS can claim the sale proceeds before you receive a dime. That’s why ignoring a lien can make your financial life messy fast.

What Is a Tax Levy? The IRS’s Power to Seize Assets

A tax levy is the enforcement tool the IRS uses when you still don’t pay. This is when the IRS actually takes your money or property to cover the debt. Once the IRS levies your account or wages, the money can vanish quickly and continue until your debt is paid or the IRS agrees to stop it. That’s why acting early is critical. 

Types of IRS Levies and What They Can Take

There are several kinds of levies, and each works a bit differently:

1. Wage Levy: The IRS instructs your employer to send part of your paycheck directly to them, known as a tax levy wage garnishment.
2. Bank Levy: The IRS will freeze your bank account and may confiscate funds within your bank account after 21 days.
3. Property Seizure: They may confiscate real estate, including your car or your home, and sell this and use it to pay your tax.
4. Social Security or Retirement Levy: The IRS is able to seize a portion of your monthly benefits, but there are some limits.
5. Accounts Receivable or Business Assets: For business owners, the IRS can claim payments owed by customers.

Each type of levy can hit hard, but you usually have time to respond before it happens.

IRS Levy Process: Notices and Timeline

Before the IRS levies anything, it must follow legal steps. And it’s designed to give you a chance to fix the problem first. Here’s the basic timeline:

1. Notice and Demand for Payment: The IRS first tells you how much you owe.
2. Final Notice of Intent to Levy and Notice of Your Right to a Hearing: This is your last warning.
3. 30-Day Waiting Period: You have 30 days to pay, request a hearing, or set up a payment plan.

If you do nothing, the IRS can begin taking your wages, bank funds, or property after the 30-day window. This right to a hearing is part of what’s called your IRS appeal rights tax levy. If you act within that time, you can delay or even stop the levy.

Tax Lien vs Tax Levy: Key Differences Explained

Here’s where most people get confused. A lien and a levy sound alike, but they play very different roles in the IRS collection system.

How Does a Tax Lien Affect You?

A tax lien doesn’t take your money, but it can still hurt you in many ways. Once filed, it’s public. Lenders, landlords, and even employers can see it. Here’s how it affects you:

• Loan trouble: Banks often refuse loans or refinancing until you clear it.
• Sale limits: You can’t sell your home without paying the lien first.
• Job risk: Some employers check your records before hiring.
• More pressure: Interest and penalties keep adding up every day.

Even though the IRS stopped sending lien data to credit bureaus, public databases still show it. 

How Does a Tax Levy Affect You?

A tax levy is the IRS taking what it’s owed. This can happen:

• Your paycheck shrinks: The IRS tells your employer to garnish wages from your salary.
• Your bank account empties: Funds can vanish after a 21-day freeze.
• Your stuff gets taken: The IRS can seize cars, property, or business assets.
• Your business suffers: The IRS can take payments owed by your customers.

How to Prevent a Tax Lien or Levy?

The easiest way to deal with tax trouble is to act before the IRS acts. Preventing a lien or levy isn’t complicated, but it does require attention. Here are practical ways to stop things from getting that far:

1. Answer every IRS letter: Even if you can’t pay the full amount, respond. Communication shows good faith.
2. Set up tax payment arrangements: If you can’t pay all at once, ask for tax payment arrangements or tax debt relief like an installment plan.
3. Offer in Compromise: If your financial situation is bad enough, you may qualify for an OIC. This lets you settle for less than what you owe. The IRS accepts these only if it’s clear you can’t afford full payment.
4. Stay current: Pay new taxes on time while clearing old ones.

How to Remove or Release a Tax Lien?

Once a lien is in place, it doesn’t have to be permanent. You have several tax lien removal options depending on your situation. Here are your main tax lien removal options explained simply:

• Full payment: Once you pay your back tax completely, the IRS releases the lien within about 30 days. That’s the cleanest and fastest fix.
• Installment plan: If you are unable to pay the whole amount, a regular payment program can be adopted.
• Withdrawal: In some cases, the IRS will remove the lien notice from public record. This makes it look as if the lien never existed, though you still must stay current on payments.
• Property discharge: Sometimes, you can sell or refinance a particular property despite the existence of a lien on that property. It will be permitted by the IRS if the sale proceeds are directed to your tax debt.  

Once the lien has been discharged or withdrawn, always demand written receipts on the same from the IRS and verify the public records to guarantee that the IRS clears the lien.

How to Stop or Release a Tax Levy?

Stopping a levy requires fast action. Once it begins, your money or property can disappear quickly. Here’s what you can do:

1. Request a Collection Due Process (CDP) Hearing

You have the right to appeal before a levy happens. This is part of your IRS appeal rights, tax levy protection. File for a hearing within 30 days of receiving the Final Notice of Intent to Levy. During the hearing, you can propose a payment plan, show proof of hardship, or challenge the amount owed.

2. Prove Economic Hardship to Stop a Levy

If the levy leaves you unable to afford essentials, rent, food, or medical bills, you can ask the IRS to lift it temporarily. This is known as proving economic hardship. You’ll need to submit documents showing your income, expenses, and bills. If approved, the IRS will release or pause the levy.

3. Settle or Pay the Debt

Paying in full, entering an installment agreement, or settling through an Offer in Compromise can also stop the levy. Once an agreement is active, the IRS generally pauses enforcement.

4. Contact the IRS Immediately

If your paycheck or bank account has already been levied, contact the IRS right away. Acting within the first few days gives you the best chance of reversing or reducing the seizure.

When to Seek Professional Help for Tax Lien vs Tax Levy Issues

Sometimes, the situation gets too complex to handle alone. You should reach out to a tax professional when:

• You’ve received multiple IRS collection notices and can’t pay in full.
• The IRS has already filed a lien on or levied your wages.
• You want to submit an Offer in Compromise or request a hearing.
• You’re unsure what your rights are under federal tax rules.

Tax experts at Bowes & Sullivan understand tax debt enforcement laws and can communicate with the IRS on your behalf.

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Protect What’s Yours with Bowes & Sullivan

When the IRS files a lien or pulls a levy, your pay, bank funds, or home can be at risk in a matter of days. Don’t wait; the IRS will act if you ignore notices.

Bowes & Sullivan moves fast to stop seizures and clear liens. We negotiate with the IRS, file appeals and CDP hearings, set up installment agreements, arrange Offers in Compromise, and prove economic hardship to get levies released.

Every day you wait makes it harder. Contact us to stop the levy and protect what’s yours.

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