What is the Difference Between an IRS Lien and an IRS Levy? Part I

Tax Liens and Tax Levies are staples of the Internal Revenue Service's tax debt collection enforcement machinery. They are two of the very common methods the IRS uses to get the money it's owed if a taxpayer doesn't write a check voluntarily, or for that matter, quickly enough.

A tax lien first arises when a person who owes taxes fails to pay after an official "demand" by the Internal Revenue Service. The lien is sometimes referred to as a "secret lien" because even though at first there is no public record, it attaches to all of the taxpayer's property and rights to property--both real estate and personal property--as of the date the tax is assessed. The consequences of this is that if taxes are assessed against you on July 1st, and you give the property to a third party as a gift on July 2nd, the tax lien continues to attach to that property even though you had no knowledge of the existence of the tax lien and even though the person who received the property didn't know that the tax lien had arisen.

This occurs frequently in divorces when one spouse who owes taxes to the IRS transfers ownership of property to the other spouse as part of a marital dissolution. Even though neither spouse is aware of the tax lien, it continues to attach to the property in the hands of the spouse who didn't have any tax liability, and the IRS can collect the taxes owed by seizing and selling the property.

Certain third parties are protected from the impact of the secret tax lien. These are generally people who gave "fair value" for the property received. For example, if your home was subject to a secret IRS tax lien and you sold it to a third party for its fair market value, the IRS could not go after your home once it had been transferred to someone else. To be clear, this rule would not be of any help if the person who received the home paid less than its actual value, or received it as a gift or an inheritance.

When most taxpayers or tax attorneys refer to a tax lien, they are actually referring to a "Notice of Federal Tax Lien." A Notice of Federal Tax Lien is a document filed in a public place such as a County Recorder's Office or with the Secretary of State. It is a notice to the world that you owe taxes. A Notice of Federal Tax Lien generally lists the amount of the taxes owed, the type of tax, and even the years for which taxes are owed. It also lists the date the tax was assessed. It is worth noting that the Notice of Federal Tax Lien is a static document. Therefore, if you make payments on your tax liability, the Notice of Federal Tax Lien will continue to list the same amount due.

Likewise, as interest and penalties accrue it will not be updated to reflect the additional amounts due. That is why the amount listed in the NFTL is not a true reflection of your tax liabilities.

The Notice of Federal Tax Lien will be picked up by the various credit reporting agencies and will cause significant credit problems. If you own real property and try to sell it, the IRS will be paid the equity in your property. The tax lien does not, however, take any money out of your bank account.

Once the Notice of Federal Lien is filed you will receive a notice giving you 30 days to contest it. If you receive one, give us a call so that we can advice you on how to proceed.

In Part II on this video, I will tell you about Tax Levies.