Just like any balance you owe a creditor, action may be taken if the balance becomes delinquent. Although the IRS is a not a creditor in the traditional sense; they have not loaned you an amount of money for example, they do have a right under the 16th Amendment and Title 26 of the US Code to collect tardy debts.
After repeated warnings, a taxpayer who does not address their federal tax obligations may subject themselves to a Notice of Levy or a Notice of Federal Tax Lien.
What are the differences in these collection tools? When does the IRS issue a levy or lien? And the most important question you likely have is how does one go about having either one lifted?
It’s important to understand that the IRS never immediately moves to an enforcement action unless the taxpayer has been provided notice, opportunity and their rights to appeal.
Under exigent circumstances, if the collection of a tax debt has been put in jeopardy because a taxpayer has moved to dispose of assets or reassign title to real property in order to avoid the reach of IRS collection activity, then the Service may move to seize those assets.
In almost all other situations however, a taxpayer who owes a sum of money to the IRS will be sent a number of balance due notices. Each notice will advise the taxpayer of the unpaid debt, the accrued penalty and interest, and will encourage the taxpayer to contact the IRS immediately.
Should these notices go unheeded, the IRS will issue a final notice. The notice is strongly worded, and makes it abundantly clear that the IRS intends to issue a levy or a lien as their next act.
One such notice is a CP-504. The notice has the word ‘Urgent!!’ as the title, written with two exclamation points, and indicates that the IRS “intends to levy on certain assets. Please respond NOW.” The notice also warns of the possibility of a lien being filed.
Another version of the final notice, sent by the IRS collection department, is Letter 11, entitled, “Call Immediately to Prevent Property Loss / Notice of Intent to Levy and Notice of Your Right to a Hearing.”
This letter is sent certified, and requires signature at the Post Office. This allows the IRS to know if the notice was received, unclaimed or undeliverable. The IRS is required to send this notice to the last address they have on file for a taxpayer. If a taxpayer has moved and failed to advise the IRS, or if they are not current in filing and the IRS thus does not have their current address on record, then the notices may not be received. Nevertheless, it is not the responsibility of the IRS to track you or locate you; collection action will ensue once the final notice is sent.
Other notices may advise of the IRS intent to levy on a taxpayer’s Social Security benefit income, their state refunds, or other federal contract income.
Levy or Lien
A levy is a seizure, or garnishment, of a taxpayer’s property to satisfy a tax debt. A Notice of Levy is used to seize a taxpayer’s property, held by a third party, if it can be turned over by writing a check. So, for example, a taxpayer’s bank account, wages, commissions, retirement benefits, and money received as a contractor, all of which can be paid through the instrument of a check, are within reach of the IRS.
A levy attaches to a portion of a taxpayer’s pay. All levies are sent directly to the payer. A chart accompanies a wage levy notice, and advises the employer how much is exempt from a taxpayer’s pay, based on the taxpayer’s filing status, exemptions and pay period.
As directed in the levy notice, the employer is to give a copy of the levy to the employee, who then needs to fill out the above information so that the appropriate amount can be withheld. If an employee fails to provide this information to the employer, the IRS directs the employer to withhold at the highest rate.
A tax lien on the other hand is a legal claim on an individual’s property for payment or satisfaction of a tax debt. It attaches to all property or rights to property the taxpayer has or acquires, whether real and personal, tangible or intangible.
See the related article for more information on lien filing.
Both a Notice of Intent to Levy and a Notice of Federal Tax Lien filing carry Collection Due Process appeal rights. Collection Due Process can be exercised before the IRS issues a levy, and after they have filed a lien.
The IRS has a second appeal procedure, called the Collection Appeal Program, to deal with other issues, including the above as well. The Collection Appeal Program covers multiple IRS actions, including:
Written rejection of an installment agreement request.
Proposed termination of an installment agreement or an actual termination of the agreement.
Before or after the filing of a Notice of Federal Tax Lien
Before or after the serving of a notice of levy.
Before or after the seizure of property.
After the denial of a request for property to be discharged from a lien.
After the denial of the subordination of a lien.
After the denial of the withdrawal of a lien.
Each letter that the IRS sends regarding the above actions will carry information about how to go about exercising these appeal rights.
Removing a Levy or Lien
In general, the IRS will lift a levy on income only after a balance has been paid in full, resolved with a voluntary payment plan, or if a financial hardship condition has been established.
Some balances arise due to an audit or because of a reversal of something claimed on a taxpayer’s return. If this is the case, and if a taxpayer has submitted information to dispute the assessment, then the levy can be lifted if the IRS agrees with the information that has been sent in.
If a taxpayer owes because their tax return showed they owed, and they have now allowed the balance to become delinquent to the point a wage levy has been issued, then the IRS will generally only agree to lift the levy when the balance has been resolved with some sort of payment plan.
Keep in mind that in order to be eligible for a payment plan, all tax returns that a person is legally obligated to file must first be sent in. This means that if a taxpayer has a levy on wages, and they also have unfiled returns, the levy will remain in place until all returns are filed and processed, and until a payment plan has been established on all open balances.
A levy on a bank account is different than a wage levy in that it is not a recurring levy. A levy on funds in an account reaches 100% of the funds in any account at the time the bank that was served with the levy. The bank is required to hold the funds for a short period of time, and then turn the funds over to the IRS.
Additional deposits are not subject to the levy. Once the funds are remitted, the effect of the levy is over. Because it is a “one-time” levy, the IRS usually will not lift a bank levy unless extreme circumstances exist.
Liens are also rarely removed. A lien will show as satisfied only after the balance has been paid in full. Even then, the fact that the IRS issued a lien will remain on an individual’s credit for many years.
A lien can only be withdrawn under special situations, such as if the filing of the lien was premature or otherwise was not done according to IRS procedure.
Because of the above, be wary of any so called tax resolution firm who pledges immediate lien removals or the lifting of levies. Many make such promises in order to snare clients, and only provide actions that a taxpayer can and should do themselves.