What's the Difference Between a Tax Lien and a Tax Levy?

Taxpayers often confuse the terms tax lien and tax levy and do not understand the difference in actions represented by these concepts. While liens and levies can both be filed by the IRS and the California Franchise Tax Board (FTB) and there are many similarities to when they are issued and how they can be removed, liens and levies are terms for very different actions.

A lien is a legal claim the federal or state government makes against your property to secure payment of debt. It can be seen as similar to collateral. The lien protects and secures the IRS’s or FTB’s right to property you currently own and any you purchase later. The most common property a lien is filed against is real estate. The Internal Revenue Code grants limited priority to creditors as long as the loan or purchase was made within 45 days of the Notice of Federal Tax Lien or if the loan or purchase was made before the lender or purchaser had knowledge of the filing. It depends on what you knew and when you knew it.

A levy is a legal right to seize your property to satisfy a tax debt. It allows the IRS or FTB to take your property, the same as seizure or garnishment. A levy can be filed on your wages, bank accounts, subcontractor pay, accounts receivable, and retirement accounts. Also, the federal or state government can seize your house, car, or business equipment. The only exceptions are exemptions listed in Internal Revenue Code 6334 forbidding the levy of certain items, including most unemployment benefits, workers compensation, most household goods, and some tools of your trade.

Aside from these differences, liens and levies are remarkably similar in most other respects.

When Is a Lien or Levy Filed and By Whom?

Liens and levies are filed by the federal and state tax authorities when you neglect or refuse to pay a tax bill you have received from these agencies. The Internal Revenue Service and the California Franchise Tax Board are both empowered to file liens and levies.

The IRS usually files liens with the county recorder or the clerk of courts in your county of residence or where your property is located. A lien filed by the FTB is against any property you own in California. In both instances, the lien automatically encumbers your real estate and personal property within that county or the state.

What Happens when a Lien or Levy Is Issued?

When issuing a lien, the IRS files a Notice of Federal Tax Lien, telling creditors than the federal government has the legal right to your property. You are not divested of your property or your rights to transfer it; instead, any equity you may have in the property goes to the IRS if and when you sell it.

The Franchise Tax Board mails a notice of collection action describing the tax liability, your rights to contest it, and what happens if you do not comply. The letter also contains the deadline for avoiding collection action. When the FTB files a lien, you are prevented from refinancing, selling, or transferring the property through escrow.

To issue a levy, the IRS sends you a Final Notice of Intent to Levy. Note: the IRS is not required to file a lien before filing a Final Notice of Intent to Levy. The federal government can move right to seizing your property. Also, the IRS does not do a lien search before filing a levy and has no knowledge of any other creditors.

The FTB can issue a Notice of Levy to levy money, or the right to money, that is held or controlled by the taxpayer or by a third party. Except for a wage levy, levies are sent as warrants to certain law enforcement bodies. Sheriffs, marshals, constables, or the California Highway Patrol receive the warrant and are required to serve it promptly. They take immediate possession of the available assets according to the instructions accompanying the warrant.

Stopping or Removing a Lien or Levy

The fastest way to get a lien or levy withdrawn or stopped is to pay the delinquent taxes, penalties, and interest immediately. If you are unable to do so, liens and levies both come with certain rights to appeal.

In the case of a federal lien, you have 30 days from the date specified in the Notice of Federal Tax lien to file a collection due process appeal. It is possible for a lien to expire but the statute of limitations on a lien for both the IRS and the FTB is ten years unless the lien has been extended. A federal lien can also be withdrawn through the Fresh Start Initiative.

Liens from the Franchise Tax Board can be withdrawn by paying the entire outstanding amount. If you cannot pay in full, you must enter into an installment agreement or be eligible for another method of payment or reduction in taxes and penalties.

If the FTB files a bank levy, your bank is required to hold the money in trust for 21 days before sending it to the state. You have this time to dispute the bank levy by asking an attorney to help you contact the FTB and the bank to stop the transfer of money. Your attorney can then attempt to get the FTB to lift the levy and convince the bank to return your money to your account.

To keep the FTB from levying your bank account again, negotiate a permanent solution to your tax problem.

When the IRS issues a levy, you have 30 days to file an appeal to prevent the IRS from taking any action until a hearing is completed. The hearing is held to determine a resolution to the levy action before it occurs. You may reach an Offer in Compromise, enter into an installment agreement, or the tax may be labeled noncollectable.  If your property has already been seized, you can request the property to be returned or ask your attorney to file suit for wrongful levy in federal district court.

Do Liens and Levies Impact Your Credit Report?

Since a lien is a public document, the credit monitoring agencies may find it and include it in your credit report. You may be prevented from conducting certain financial transactions that would increase your debt. The only way to remove the lien from your credit report is to contact each agency directly to modify or remove it once you get the lien released.

A levy is not a public record and will not appear on your credit report. Therefore there will be no impact to your credit through the monitoring agencies.

To reiterate, a levy and a lien are two different actions that may be taken by taxing authorities in an attempt to collect overdue taxes and penalties. A lien is placed against property to act as collateral until the debt is paid. A levy seizes your property to be sold, and the proceeds put against the unpaid taxes.