When dealing with unpaid taxes, either at the federal or state level, you may encounter two powerful tools used by tax authorities: liens and levies. Though they might sound similar, they serve different purposes and have unique implications for taxpayers. This blog will help you understand the differences between IRS tax levies and liens, as well as their counterparts in Idaho, to give you a clearer picture of how to address these situations effectively.
What is a Lien?
A lien is a legal claim placed on your property by a tax authority, like the IRS or Idaho State Tax Commission, as a security for unpaid taxes. Essentially, a lien ensures that the government has the right to claim your assets to satisfy the tax debt if it goes unpaid.
How Does a Tax Lien Work?
When the IRS or Idaho tax authorities assess a tax liability and send you a bill, you are expected to pay it by the deadline. If you fail to pay, the government can issue a Notice of Federal Tax Lien (or a similar notice at the state level).
This lien attaches to:
- Current assets: Your home, car, bank accounts, and other properties.
- Future assets: Any assets you acquire after the lien is filed.
A lien is public record and can significantly impact your financial situation. For example:
- Credit impact: A lien can damage your credit score and make it difficult to obtain loans.
- Restrictions: Selling or refinancing property becomes more complicated because the lien must typically be satisfied before the transaction is complete.
Lien Resolution
You can resolve a lien in several ways:
- Paying the full amount owed: This automatically releases the lien.
- Entering into a payment plan: In some cases, tax authorities may release the lien or subordinate it to allow refinancing or other financial arrangements.
- Filing an appeal or offer in compromise: If the lien is incorrect or you cannot pay, you can explore options like appealing the lien or negotiating to settle for less than the full amount owed.
Idaho Tax Liens
At the state level, the Idaho State Tax Commission can file a lien against your property for unpaid state taxes. This functions similarly to a federal tax lien but applies to Idaho tax debts such as income tax or sales tax. Idaho tax liens are also public records and can restrict your ability to sell or borrow against assets in the state.
What is a Levy?
A levy, unlike a lien, involves the active seizure of your property to satisfy a tax debt. While a lien is a claim on your property, a levy is the government’s way of taking that property to settle your unpaid taxes.
How Does a Tax Levy Work?
If you ignore notices and fail to resolve your tax debt after a lien is issued, the IRS or Idaho tax authorities may take the next step: enforcing a levy. This involves directly taking your assets, including:
- Bank accounts: The IRS or Idaho State Tax Commission can withdraw funds directly from your account.
- Wages: A portion of your paycheck can be garnished until the debt is paid.
- Physical property: Cars, real estate, and other assets can be seized and sold to pay the debt.
- Social Security or retirement income: Even federal payments like Social Security can be levied.
A levy is usually the last resort after repeated attempts to contact you and resolve the debt.
IRS Levy Process
The IRS must follow specific procedures before issuing a levy:
- Tax assessment: The IRS assesses your tax liability and sends you a bill.
- Notice of Intent to Levy: You will receive this notice, often with the right to request a Collection Due Process (CDP) hearing.
- Final warning: If no resolution is reached, the IRS can proceed with the levy.
Idaho Tax Levies
The Idaho State Tax Commission also has the authority to levy assets for unpaid state taxes. Similar to the IRS, they must provide notice and follow due process before taking your assets. Idaho levies can include wage garnishments, bank account seizures, and property confiscation.
Key Differences Between a Lien and a Levy
| Aspect | Lien | Levy |
|---|---|---|
| Definition | A claim on your property for unpaid taxes. | The actual seizure of your property to satisfy taxes. |
| Purpose | Ensures the government has priority over other creditors. | Collects unpaid taxes by taking assets directly. |
| Impact | Limits the ability to sell or borrow against property; affects credit. | Directly reduces your income or assets. |
| Process | Notice of Federal or State Tax Lien filed in public records. | Notice of Intent to Levy issued before seizing assets. |
| Resolution | Pay the debt, negotiate, or appeal. | Stop the levy by resolving the debt or appealing the action. |
How to Respond to a Lien or Levy
Steps to Address a Lien
- Pay your taxes: Full payment releases the lien.
- Set up a payment plan: A lien may be subordinated or withdrawn if you agree to a payment arrangement.
- Request lien withdrawal: If the lien is creating financial hardship or was filed in error, you may qualify for withdrawal.
Steps to Address a Levy
- Act quickly: Respond immediately to any notice of intent to levy.
- Request a hearing: A CDP hearing gives you the chance to appeal the levy.
- Settle the debt: Pay the balance in full, negotiate an installment plan, or explore an offer in compromise.
- Prove financial hardship: If the levy creates undue financial strain, you may qualify for relief.
Avoiding Liens and Levies
Proactively addressing tax issues can prevent liens and levies. Here are some tips:
- File and pay on time: Even partial payments can reduce the risk of enforcement actions.
- Communicate with tax authorities: If you can’t pay in full, explore payment plans or other options.
- Work with a tax professional: A CPA or tax resolution expert can help you navigate complex tax issues and negotiate with the IRS or Idaho tax authorities.
