When a taxpayer owes federal taxes and fails to pay them on time, the IRS can file tax liens and levies against the taxpayer. Every year, millions of Americans face federal tax liens and levies imposed by the IRS for delinquent and unpaid taxes. In 2012, the IRS issued almost three million levies to taxpayers to collect unpaid federal taxes.
IRS Tax Liens and Levies
Tax liens are different than tax levies. A lien imposes a legal claim against real property to secure payment of a tax debt, while a levy allows actual seizure of property to satisfy a tax debt.
In the United States, millions of Americans file their tax returns in April each year. If taxes are owed, they must be paid either before the April 15th deadline or paid with the submitted tax return. If money owed is not paid, the IRS will begin an official process to collect the tax debt. If a taxpayer owes a tax balance, based on an accurate tax return, it’s important to make some type of payment agreement or IRS tax settlement to satisfy the debt before a tax lien or levy is assessed. Once a tax lien or tax levy is imposed, it can have significant consequences on an individual’s finances.
The Collection Process
If taxes owed are not paid in full with a tax return, the IRS issues a bill to the taxpayer for the debt. This bill starts the IRS collection process, which continues until the account is satisfied or until the legal time to collect the tax expires. The first notice is a letter that explains the balance due and demands payment in full. It includes the amount of the tax due, plus any penalties and interest accrued on the unpaid balance from the date the tax became due.
The unpaid balance is subject to interest that compounds daily as well as a monthly late payment penalty. To minimize penalty and interest charges, it’s best to pay the tax liability in full as soon as possible. If it’s not possible to pay the balance in full right away, the IRS has available payment options that include monthly installment payments and IRS tax settlement plans. For taxpayers with substantial tax liabilities, the IRS may be willing to work out an offer in compromise (OIC), that allows a taxpayer to settle his/her tax debt for less than the full amount owed. However, taxpayers who are in bankruptcy or are able to pay the tax liability in full through an installment agreement will typically not qualify for an OIC.
If a tax debt is not paid after the first letter, the IRS will send out four more letters, typically one each month for the next four months. If a taxpayer does not respond or does not pay the debt, the next step is a tax lien assessment.
IRS Tax Liens
The IRS can formally file a Notice of Federal Tax Lien if payment is not received within 10 days of a notice, but usually, tax liens are not filed until all five notices in the notice stream are sent out without any resolution of the tax debt. A Notice of Federal Tax Lien is usually filed at a local courthouse, and it becomes a matter of public record.
Tax liens can have a significant negative impact on a taxpayer’s assets and finances:
- Assets – A tax lien attaches to all existing assets, including real estate, motor vehicles, personal property, bank accounts and securities, as well as future assets that are acquired during the duration of the lien.
- Reputation – A tax lien is public information which can be found in a title search. Many taxpayers are worried about damage to their reputation due to the information being public.
- Business – A tax lien attaches to all business property, as well as personal property. For business owners, their rights to business property and accounts receivable may be forfeited until the tax lien is resolved.
The IRS has the right to file a Notice of Federal Tax Lien against any taxpayer, business or individual, who owes the IRS more than $10,000 in unpaid taxes. Once a tax lien is filed, the IRS has up to 10 years to collect the debt. A tax lien doesn’t mean that the IRS will seize assets or garnish wages, it only ensures that they get first right to the money owed over other creditors. A tax levy is a much harsher penalty which allows the IRS to seize assets and property, money in bank accounts, employment wages, and tax refunds. A tax levy should be avoided at all costs to avoid significant financial hardships.