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

by Bryan Miller, Tax Analyst, JK Harris and Company

Lien

As the definition implies, a lien is simply a claim to property by securing payment of tax debt if that asset is sold or liquidated. In essence, the IRS makes themselves your primary creditor to the attached property (as opposed to your mortgage or loan company). A lien will not harm most taxpayers other than their credit report. A taxpayer with a federal lien may not be able to attain a loan or credit; otherwise, the lien simply resides on their credit report to govern equity in the property. If the property is sold with at a gain, the tax lien is paid in whole or in part from the gain. If the property is upside down, the taxpayer may request a discharge of the lien to accommodate the sale. See Publication 783 for the form and instructions on a lien discharge, and Publication 4235 on addresses to send the request by region. Also, a temporary subordination of the Federal Tax Lien can be utilized if you are trying to refinance or restructure a mortgage. For more information and the form, see Publication 784.

In some professions where personal credit affects the business or ability to conduct business (such as partners in law firms, real estate developers) the lien can actually cause unforeseen harm. This is not intentional, and for these reasons, the IRS will consider releasing a lien either temporarily or permanently on a case by case basis. See Publication 1450 for instructions and state by state phone numbers to accommodate this process. (Note: The correct form for withdrawal of a lien is Form 12277.

Remedy

The only remedies for liens are those as described above. For a levy, the answer is to begin working with the IRS in either compliance or resolution. Compliance involves filing all outstanding tax returns, forms, or information for which the IRS may be requesting. A taxpayer must be compliant before seeking a final resolution. The IRS will only resolve the entire scope of the taxpayers’ liability, not just one year or another.

Resolution involves either establishing an installment payment plan, or providing the IRS 3 months of current financial information for qualification purposes. All resolution programs with the IRS have to be qualified for your unique circumstance to determine the ability to pay the back tax debt, provide proof that the debt cannot currently be paid (hardship cases), or determine that the debt can be paid but not in full. The IRS will require Collections Information Statement Form 433-A (for individuals and self-employed individuals), Form 433-B (For businesses), or Form 433-F (short form of 433-A used primarily by those with little income and assets, retirees, etc.).

Seeking professional assistance in divulging financial information to the Internal Revenue Service is highly recommended. The IRS will look at current income, expenses, assets, equity, access to cash-value holdings, retirement accounts, as well as go though bank transactions and the sales or disposition of assets and equity over the past few years. Knowing how the IRS interprets these documents and transactions to render a conclusion is imperative in working out the best tax resolution the IRS will accept under the Internal Revenue Code.

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