What's the Difference Between a Tax Lien and Levy?

Roni Deutch
June 30, 2009 — 1,928 views  
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The tax world is full of jargon and enough acronyms to make your eyes cross. Its no wonder so many people are confused about the difference between a tax lien and a levy.

The term "levy" is used to describe a number of collection methods the IRS employs. Levies actually redirect funds to the IRS as a repayment of a debt. Following are a few different types of levies:

Wage garnishments actually fall under the levy heading. Wage garnishments redirect a portion of your income directly to the IRS. A garnishment continues until either the debt is repaid, expires, or you successfully negotiate a release. Wages can be a paycheck from your employer, federal payments like Social Security, or if you are an independent contractor, accounts receivable.

Bank levies are one-time events. The IRS freezes assets in an account up to the amount owed plus interest for 21 days then takes those funds to repay your debt. The 21-day period is supposed to allow for resolving account ownership.

Property seizures constitute the most extreme use of a levy, allowing the IRS to actually take and sell your property. This could be a car, or a boat, even a house. Again, this is not terribly common and usually only used in extreme cases.

A levy is an active form of collections, and a taxpayer must be sufficiently warned before the IRS will undertake any type of levy. Generally, they mail several notices with one final 30-day notice. This 30-day period is your window to take action to resolve the debt, or make an appeal. I recommend taking action as soon as the first notice arrives. Fighting a levy takes time for even the most experienced tax attorney or CPA.

A lien, on the other hand, is a passive form of collections. Tax liens essentially "lock" your property (whether a car, or a home, even artwork and jewelry) so that should you sell it, the IRS gets first crack at the proceeds. I often hear from clients asking, "when can you get my lien released?" And the honest answer is, when the debt is paid or expired. You cannot argue to have a lien removed; tax liens stay in place until the debt is repaid in full or expires. Even if you enter into a tax debt resolution with the IRS, such as an Installment Agreement, the lien stays put. This is a security measure protecting the IRS's interest. However, a tax lien should not impact your life or finances, provided you don't sell your property.

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Roni Deutch