When you don’t pay your taxes, the IRS can levy your wages as well as file a Federal Tax Lien against you. The levy allows the IRS to confiscate your entire paycheck except for the value of the exemptions you’ve claimed, while the lien is a public record showing that you owe the IRS and it gives them the right over other creditors to seize your property.

Federal Tax Liens

If you have have unpaid taxes and have not been cooperating with the IRS in terms of their repayment then the IRS will file a Federal Tax Lien against you.

What is a federal tax lien?

A Federal Tax Lien is a notice document that the IRS files with the county recorder in the area in which the taxpayer lives or conducts business so that the public is notified that the taxpayer has an unpaid federal tax debt. The IRS does not file the lien so as to embarrass the taxpayer. Rather, since the lien attaches to the taxpayer's property, both real and personal, the IRS must put the "world" on notice that it has a superior lien that will need to be paid in full if the property is to be transferred with clean title. This is how the IRS protects themselves and ensures that they will be paid. The bottom line is that if property is sold while a lien is in effect, the IRS will be paid out of the sales proceeds before the taxpayer is paid.

How do you prevent a federal tax lien from being filed against you?

There are several ways to prevent a Federal Tax Lien from being filed against you. The first is to pay the taxes you owe in full before any lien is filed by the IRS. This is unfortunately not a feasible solution for many taxpayers. Installment Agreements are an excellent way to prevent the IRS from filing a Federal Tax Lien. The IRS will not file a Federal Tax Lien if a taxpayer sets up either a Guaranteed Installment Agreement or a Streamlined Installment Agreement, among other options.

How do you remove a federal tax lien?

The IRS will remove a federal tax lien if the lien was filed in error, if the outstanding balance is paid in full, if the outstanding balance is otherwise satisfied (for example through a successful Offer In Compromise), or if the lien becomes unenforceable (for example, because the lien has expired due to the ten-year statute of limitations).

A lien will be removed with either the lien being withdrawn or the lien being released.

When one speaks to a lien being withdrawn the IRS is actually rescinding the lien, as if the lien was never filed in the first place. This is the gold standard, the holy grail, and what every taxpayer should aim for when negotiating a settlement with the IRS. Why would the IRS withdraw a lien? A lien will typically be withdrawn because (i) it was originally filed in error, say against the wrong person, (ii) the lien is eligible to be withdrawn pursuant to the IRS's Fresh Start Program, or (iii) the withdrawal of the lien is negotiated with the IRS.

When a Federal Tax Lien is released it means that the lien no longer encumbers your real or personal property. The county recorder's office will also update the public records to reflect the fact that the lien has been released.

So, what's the difference between a lien being withdrawn and it being released? The major difference is that a released lien will still remain on your credit report for up to ten years while a withdrawn lien will be removed from your credit report as if it never existed. Liens are typically released upon payment in full of all amounts owed to the IRS or upon setting up an installment agreement which does not otherwise provide for the lien to be withdrawn. The IRS may also release a lien if it would better allow them to collect the money owed to them: for example, they will release a lien in connection with the sale of your home where they'll be repaid in full what they're owed directly from the sale proceeds.

Federal Tax Levy

A Federal Tax Levy is the actual taking by the IRS of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for a tax debt, while a levy actually takes your property to satisfy the tax debt. They both hurt, but in terms of their day to day impact on a taxpayer's finances a Federal Tax Levy is far worse.

What leads to a federal tax levy?

By failing to pay your taxes, or not making arrangements to settle your tax debt, the IRS may seize and sell any type of real or personal property that you own or have an interest in. At it's core, a Federal Tax Levy is how the IRS goes about getting paid for the debt you owe them when you refuse to pay voluntarily.

The IRS can seize and sell any property that you own, such as a car, boat, or house. They can also levy property of yours that is held by someone else such as wages, retirement accounts, bank accounts, rental income, accounts receivables, the cash value of your life insurance, etc.

When will the IRS levy your property?

The IRS will usually only levy a taxpayer's property after the following three requirements are met:

  • the tax was assessed and the taxpayer was sent a Notice and Demand for Payment;
  • the taxpayer failed or refused to pay the taxes owed; and
  • the taxpayer was sent a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy goes into effect.

How do you remove a federal tax levy?

Upon receipt of the Final Notice of Intent to Levy and Notice of Your Right to a Hearing from the IRS the taxpayer will have thirty days until the IRS will begin seizing assets. The IRS will then continue to take the taxpayer's assets until the money received from those assets covers the outstanding tax bill plus all penalties and interest. The goal of the IRS when they levy a taxpayer's property is of course to get paid, but it's also to get their attention. Therefore, the IRS is still willing to enter into various agreements with the taxpayer so as to get ultimately get paid.

Upon entering into one of the following agreements the IRS will remove the Federal Tax Levy:

* Pay the amount owed in full, plus penalties and interest;
* Enter into a Regular Installment Agreement;
* Enter into a Streamlined Installment Agreement;
* Enter into a Partial Payment Installment Agreement;
* Enter into a Guaranteed Installment Agreement;
* Enter into a Offer In Compromise;
* Evidence to the IRS that the levy causes financial hardship;
* Evidence to the IRS that your assets have no value (i.e., no equity);
* Allow the Statute of Limitations to Expire. By law, the IRS has 10 years to collect on taxes owed from the original date of assessment. The IRS does have various ways in which they attempt to have the Statute of Limitations extended, but if you have not heard from the IRS for 10 years after the tax was first assessed it's unlikely you'll hear from them in the future;
* Appeal the tax levy;
* Post a bond for the full amount of taxes owed, plus penalties and interest; or
* File bankruptcy. This is an often overlooked, but very powerful, way to remove a Federal Tax Levy and possibly even eliminate your tax debt.