How Tax Liens and Levies impact on your Personal and Business Life

Lien and Levy - Defined

Let us first understand what is lien:

IRS imposed lien is an encumbrance on taxpayer’s property to secure a tax debt the taxpayer owes to IRS. The statement that someone's property is "tied up" describes the effect of liens on both real and Personal Property.

A lien attaches not only to all of a taxpayer’s assets owned currently, but also, to future assets acquired during the duration of the lien.  What it means is that you cannot sell a property without first satisfying IRS debt, no matter when you to it.

Once the IRS files a Notice of Federal Tax Lien, it may limit taxpayer’s ability to get credit. The lien attaches to all business property and to all rights to business property, including accounts receivable. If taxpayer files for bankruptcy, his/her tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.

Levy is different from lien. A levy is a seizure. Levy means “the obtaining of money by legal process through seizure and sale of property; the raising of the money for which an execution has been issued”.

IRS defines Lien and Levy as: A levy is a legal seizure of your property to satisfy a tax debt. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

A Tax levy, under United States Federal law, is an administrative action by the Internal Revenue Service (IRS) under statutory authority, without going to court, to seize property to satisfy a tax liability. The levy "includes the power of distraint and seizure by any means". The general rule is that no court permission is required for the IRS to execute a section 6331 levy. For taxpayers in serious debt to the IRS, the most feared weapon in the IRS arsenal is the tax levy. Using the powers granted to the IRS in the Internal Revenue Code, the IRS can levy upon wages, bank accounts, social security payments, accounts receivables, insurance proceeds, real property, and, in some cases, a personal residence. Under Internal Revenue Code section 6331, the Internal Revenue Service can “levy upon all property and rights to property” of a taxpayer who owes Federal tax. The IRS can levy upon assets that are in the possession of the taxpayer, called a seizure, or it can levy upon assets in the possession of a third party, a bank, a brokerage house.

IRS Process of recovering Tax Debt

As mentioned above, if a person does not pay taxes, the IRS may seize and sell any type of real or personal property that a person owns or has an interest in. For instance,

The IRS does not levy any property unless three requirements are met:

In certain circumstance, the IRS may give relief to the taxpayer. If IRS determines that the levy is creating an immediate economic hardship, the levy may be released. But release of a levy does not mean that taxpayer has been relieved from his/her tax debt. The IRS may work with taxpayer to make a payment plan or take other steps to help taxpayer pay off the balance. For instance, a taxpayer may file “Offer in Comprise” to relieve from his tax obligation.

The IRS may levy your wages, salary and other income. If the IRS decides to levy taxpayer’s wages, it sends notice to the employer. This is a legal notice and employers are obliged to comply.

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