The Internal Revenue Service (IRS) has two powerful tools to collect taxes: a tax lien and a tax levy. Although they are often discussed together, a tax lien is different from a tax levy. A tax lien is notice to others that the IRS has a right to your property (a security interest), but it does not result in the IRS taking property from you. A tax levy describes the actual taking of property. Taking property does not necessarily mean removal of something from your home (although that may happen in rare cases). More commonly, a tax levy refers to the taking of money from wages or benefits before the money actually gets to you. This article explains the differences between a lien and a levy and how the IRS uses them.
If you owe the IRS a lot of money, the IRS will file a lien against you. A lien is usually filed in the county where the taxpayer lives or owns real estate. The lien does not name or identify a specific piece of property. It attaches to any property located in the county where the lien is filed. The lien attaches to real property (for example, a home or land) and personal property (for example, a piece of jewelry) you may own at the time the lien is filed. A lien may also attach to any property you acquire or purchase after the lien is filed. Most people are concerned about tax liens because they can become a problem if you try to sell or refinance your house. Tax liens will also affect your credit score. In some cases, tax liens may also affect your ability to get a job. Here’s an example of how a tax lien works:
Sandra owns a home that is valued at $200,000. She has a mortgage and still owes $175,000 on the house. Sandra also owes $20,000 in federal taxes. The IRS has filed a lien against her. Before the IRS filed a tax lien, Sandra had $25,000 in equity in her home ($200,000 value - $175,000 mortgage = $25,000 equity). Because of the lien, $20,000 of Sandra’s equity in her home belongs to the IRS. The IRS can add penalties and interest to this amount. If Sandra wants to sell or refinance her house, at the time of closing (sale), the IRS will get the amount of the lien, plus interest and penalties that have accrued (added up) and any filing fees to release the lien.
Before 2011, the IRS filed liens automatically if a person owed more than $5,000. In 2011, however, as part of its “Fresh Start” program, the IRS increased the lien threshold. Now the IRS usually will file a lien only if the amount due exceeds $10,000. The recent change in the lien threshold amount will not release an earlier lien filed for an amount less than $10,000.
You will receive notice if the IRS files a lien against you. If you disagree with the lien, you have 30 days to file an appeal through a collection due process (CDP) action. In a CDP appeal, you may explain why you think the lien is not proper. This includes stating defenses such as an innocent spouse or other defense.
Liens are released when paid or when the amount due is adjusted (for example, you win an appeal and the IRS agrees that you don’t owe the money). A tax lien will automatically expire when the statute of limitations on a legal action expires. The statute of limitations on a collection action is generally 10 years from the date of assessment (the date the amount of taxes due is determined). You may also request that the IRS withdraw a lien under certain circumstances.
A tax levy is a legal procedure in which the IRS takes a home or other asset in order to pay a tax debt. For low-income taxpayers, most levies are against bank accounts, wages, future tax refunds, or even Social Security benefits. A levy against a bank account is only valid against the amount in the account at the time the levy is served and will not attach to future deposits. A levy on wages or benefits, however, is continuous—this means your wages or benefits will be levied until the debt is paid in full. There are a few ways that the IRS may levy.
The Federal Payment Levy Program
One simple way for the IRS to collect unpaid taxes is through the Federal Payment Levy Program (FPLP). For low-income or disabled taxpayers, the levy is often on Social Security benefits. The IRS will match its database of delinquent taxpayers to the government’s Financial Management Service records—a database that identifies individuals entitled to receive Social Security benefits or other federal payments. After making a match, the IRS will send notices telling a taxpayer that the IRS will begin a levy on the taxpayer’s Social Security benefits. Under the FPLP, the IRS may levy up to 15 percent of a person’s Social Security benefits each month. This includes survivors and disability insurance benefits. The IRS will not levy certain benefits, including children’s benefits, Supplemental Security Income (SSI) payments, and lump sum death benefits.
The State Income Tax Levy Program
Another way to collect taxes is under the State Income Tax Levy Program (SITLP). Under the SITLP, the IRS may levy your individual state tax refund to pay federal taxes due. The SITLP matches delinquent tax accounts against a database of state tax refunds. If there is a match, the IRS may levy your state tax refund. Generally, both the state and the IRS will issue notices advising you of the levy, and the IRS will give you the opportunity to appeal. In some cases, if you previously received a notice of intent to levy advising you of your right to a hearing, the IRS will not issue a notice.
The Non-Federal Payment Levy Program (Manual Levy Program)
Another way to collect taxes is through the manual levy process. This is a more difficult process for the IRS. This process is extreme because it may result in a levy of up to 100 percent of the taxpayer’s income each month. Usually, the manual levy is used only when a taxpayer has been completely uncooperative and/or unresponsive. If you have been subject to a manual levy, you may still argue for an exemption for reasonable living expenses. The amount of the exemption from manual levy depends on the size of your household and may be found in IRS Publication 1494 (from the IRS website). In 2011, the amount exempt from levy for a single taxpayer is $791.67 per month.
What You Should Do if You Receive an IRS Levy
If you receive an IRS levy, don’t panic. There are things you can do, and not everything is subject to levy. Some things, such as unemployment benefits, workers compensation benefits, most household goods, and tools necessary to allow you to work, are exempt from levy. The complete list of exemptions is in Section 6334 of the Internal Revenue Code. If you receive any letter or notice from the IRS, such as a Notice of Intent to Levy or a Final Notice of Intent to Levy, you should take action immediately.
What You Should Do if You Do Not Owe the Tax
The IRS must give you notice before it may levy your property. This is called a Notice of Intent to Levy. Once you receive this notice, you have 30 days to file an appeal. If you file the appeal, this will stay (stop) the collection action until your hearing is over. Even if you miss the 30 days but you feel that you do not owe the taxes, there are other things you may do. You may file for an audit reconsideration and show evidence that the debt is wrong. You also may file for innocent spouse protection. The IRS will suspend the levy action while it considers these applications, which may take several months to review.
What You Should Do if You Owe the Tax but Cannot Pay It
If you believe that you owe the tax but you are unable to pay it, you may:
Call LSNJ’s Low-Income Tax Clinic
The Low-Income Tax Clinic at Legal Services of New Jersey is available to help you if you receive a levy notice from the IRS. For any tax-related questions, contact the Low-Income Tax Clinic at 1-888-576-5529. Remember: If you do not respond to the notice, it is likely that the IRS will be able to take your benefits.
This information last reviewed: Aug 3, 2017