I have received a collection notice from the IRS: Is it a federal tax lien or tax levy? What is the difference?

Part one of a two part series

by Bryan Miller, Tax Analyst, JK Harris and Company

Enforced Collections

If you have received notices from the IRS regarding a federal tax lien or notice of intent to levy, you may be familiar with the feelings of panic and frustration that follow. Many taxpayers may be aware that they have a tax problem, but it is usually at this point that JK Harris attains many of our clients.

Most taxpayers perceive any correspondence from the IRS as negative and of equal merit. Not all correspondence from the IRS is negative. These notices happen to be quite negative correspondence in the form of a collection activity effort, however, they are certainly not of equal merit. Some taxpayers may confuse these notices, or may be somewhat familiar with one and not the other. However, most taxpayers are completely unfamiliar with IRS enforced collection activity and therefore do not know what to do or how to handle the situation.

Sound familiar? Understanding what a tax lien and a tax levy is, what it means to you as a taxpayer, and what these two notices affect in real day-to-day practice is essential to understanding one of the most feared collection tactics of the IRS.

To begin in short order, a levy is much more severe than a lien. For a definition from the IRS web site:

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.

Levy

A levy may take two forms, but the result is the same: 1) a levy may forfeit property in your possession, or 2) forfeit your rights to certain property that is held by others. This forfeited property will be used to pay down or pay off your back tax debt. Property in your possession may include a home, vehicle, boat, or business assets. Property that is rightfully owned by you but held by others includes: wages (often referred to as a wage garnishment), retirement account, certificate of deposit, money market account, bank account, professional licenses rental income, accounts receivables, 1099 income, commissions, and any cash value instruments such as loan value on life insurance.

Scary stuff, no doubt. But from all of the above, the IRS regularly uses some tactics more than others in everyday practice. Unfortunately, businesses are more susceptible to damage than an individual taxpayer. For example, individual taxpayers are much less likely to have a home or vehicle seized than a business owner to have assets seized.

Liquidating certain business assets is not the same as depriving someone of their primary residence. Even so for the business owner in most cases, the IRS would only look to liquidate excess, or non-essential assets that should not impede business operations. Taxpayers’ homes are usually only seized in cases of fraud or criminal activity. In either case, the IRS sees this as a last resort effort for such extreme measures to be taken.

Seizure of rights to property is much more common, the top two being wage garnishments and bank levies. These are not as damaging overall, yet very effective and attention grabbing, which is the point. Important to note here: the IRS notification process, for any reason, is via mail to the last known address; it is deemed a taxpayer’s responsibility to update the IRS with current information. So even if you do not receive the IRS notice by either mishap or misinformation through the mail, you will certainly take notice when money is frozen in your bank account, or your employer advises that the IRS has attached your wages. This can not only be embarrassing, but cause many residual issues on top of the IRS problems as well.

A real problem may arise here again for the business owner. If the IRS attaches account receivables (those who owe you money needed to run your operations), the account will have to pay the IRS in lieu of paying the business. This can particularly be a problem if the IRS attaches a major account of a business with only a few accounts, or a single account. Subcontractors or 1099 employees with a single employer fall into this category. Also, freezing a business bank account is no different to the IRS than a personal bank account until it is proven that the account is needed to run business operations. Even then, the IRS may only issue a partial levy release to pay necessary expenses while they keep the rest.

Tomorrow, part two of Bryan’s blog will discuss what a tax lien is, how to tell it apart from a tax levy and what the remedy for each situation is.