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What’s the Difference between a Tax Levy and a Tax Lien?

Many taxpayers are struggling to pay their taxes due to the coronavirus (COVID-19) pandemic If you fall behind on your taxes, the IRS may issue a tax levy or a tax lien on your property because you have a responsibility as a taxpayer to comply with tax laws. Knowing the difference between the two can help you make wise financial decisions should you be faced with an IRS Notice regarding either.

As a Taxpayer it’s important to note that the IRS mails notices or letters to taxpayers for a variety of reasons, such as:

  • You have a balance due.
  • You are due a larger or smaller refund.
  • The IRS has a question about your tax return.
  • Th IRS needs to verify your identity.
  • Additional information is needed.
  • The IRS needs to notify you of delays in processing your tax return.
  • The IRS made changes to your tax return.

When you receive an IRS letter read the notice, don’t ignore it. Respond timely, if a response is required.

Now let’s address the difference between a tax levy and tax lien:
A tax levy is a legal seizure of the taxpayer’s property by the IRS to satisfy a tax debt. The IRS will issue a warning first. You will be notified of a tax lien before a tax levy is activated. A tax lien only places a legal claim against your assets to settle your debts. Therefore, a tax lien puts you on notice of the IRS’ intentions while a tax levy could result in the actual loss of property. It is important to consult with a tax professional after a lien has been initiated to try to prevent a levy from being activated.
How do Tax Liens and Levies affect your finances?

Tax Lien: If you owe back taxes, the IRS can issue a lien against your personal and business property, securities, vehicles and future assets until your debt is paid. This is considered a “warning” from the IRS. It is a public record that provides notice of the IRS’s claim to your property. It alerts creditors to the fact that the IRS has a legal right to your property. As a taxpayer, you do have the right to appeal a tax lien. Therefore, a Tax Lien puts your property at risk of being confiscated if you do not settle your tax debt. A tax lien can also affect your credit standing. If you decide to file for bankruptcy, your lien could remain intact along with your obligation to pay back taxes.
A tax lien on your home can prevent you from selling or refinancing your property without special measures being taken to settle your tax debt. The IRS may authorize the sale of a home with the understanding that proceeds from the sale go towards paying back taxes. You can also request that a lien be withdrawn if you have other means of paying your taxes in full.

Tax Levy: A tax levy may affect people in different ways, depending on their circumstances and how much debt they owe. This is the IRS’s attempt to seize property to satisfy what you owe in unpaid taxes. The IRS is lawfully entitled to seize your personal property, real estate, cash, bank savings, and other assets. The IRS can also activate a wage levy, known as, garnishment that forces your employer to hold back a certain percentage of your pay each pay period until your debt is paid in full.

If the IRS imposes a levy on your 1099 receivables, it can collect any funds you are owed by your business transactions at the time of the levy. Future receivables are not affected by the levy.

Typically, you will receive a notice of intent to levy approximately 30 days prior to a levy being initiated. This is a very crucial period to take action. You may be able to stop a levy before harm is done to your finances or credit record by working with a tax professional to obtain a relief option.

By issuing a bank levy, the IRS can keep you from accessing your bank accounts until taxes are deducted. If you owe more than what is in your bank accounts, you may have all your funds deducted and still be liable for the rest.

When you receive an IRS letter, don’t ignore it. If you owe taxes and cannot pay, make arrangements. Start with complying first, always file your tax returns even if you cannot pay. Pay as much as you can. This will minimize penalties and interest.

Reminder: September 15, 2021: Tax Extension deadline for S corporations and Partnerships,

September 15, 2021: Due date for third quarter estimated tax payments

Esther Phahla is a Certified Public Accountant and Certified Tax Strategist in Temecula. She is the Author of tax planning books: “Why Didn’t My CPA Tell Me That” and “10 Most Expensive Tax Mistakes That Cost Business Owners THOUSANDS”. She also holds a Masters of Science in Taxation. She can be reached at (951) 514-2652 or visit www.estherphahlacpa.com

Written by Esther Phahla

Esther Phahla is a Certified Public Accountant and Certified Tax Coach in Temecula. She also holds a Masters of Science in Taxation. She is the Best Selling Co-Author of a Tax Planning book “Why Didn’t My CPA Tell Me That”. She can be reached at (951) 514-2652.

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