Liens and levies are tools the IRS uses to collect back taxes. Here’s more about each one — and how to avoid both of them.
If you haven’t made arrangements with the IRS to pay your tax balance, the IRS sends a series of notices to try to collect the back taxes. The IRS then starts enforced collection actions, including tax liens and levies.
How the IRS issues levies
The IRS can issue a levy to seize (take) your income and assets. The process follows several steps.
First, the IRS must provide you with:
- Notice and demand for payment
- Notice of intent to levy
- Notice of your right to a Collection Due Process hearing
Most of the time, the IRS sends five letters, starting about six weeks after you file a return. The five letters are often called the collection “notice stream” (notice numbers CP14, CP501, CP503, CP504, and L1058/LT11).
If you receive the last notice and don’t pay the balance or make other arrangements to pay, the IRS can levy your income and assets, garnish your wages and take money in your bank accounts.
How to avoid a levy
If you owe the taxes, one way to avoid a levy—or remove one—is to reach an agreement with the IRS to pay your balance. This means you’ll need to analyze your financial situation and your ability to pay the IRS.
One common solution is an extension of time to pay the full balance. Extensions can give you up to 120 days to pay the balance and avoid a levy.
If you can’t pay with an extension, the IRS offers several types of monthly payment plans, called IRS installment agreements. If you can’t pay anything, you may consider requesting currently not collectible status. This status classifies you as temporarily unable to pay. Requests for both of these agreements suspend levy actions.
Once the IRS accepts your installment agreement, the IRS won’t issue a levy unless you default on the agreement. If the IRS places you in currently not collectible status, the IRS won’t levy your assets. But the IRS can remove the currently not collectible status in the future if it determines that you can pay the tax balance.
Learn about all the IRS payment options you may have if you owe taxes and can’t pay.
How the IRS issues liens
When you owe back taxes, the IRS can issue a federal tax lien that gives the IRS a legal claim to your property. A Notice of Federal Tax Lien may also be filed at your local courthouse and is a public record. A recorded federal tax lien establishes the government’s right to your assets over other creditors.
The IRS waits to record most tax liens until after it has sent all five notices in the collection notice stream and hasn’t received payment.
You’ll want to avoid a Notice of Federal Tax Lien.Liens can affect your ability to attract new business clients, secure and maintain credit, and obtain employment.
How to avoid a lien
Avoiding a tax lien filing is more complicated than avoiding a levy. The IRS can file a tax lien even if you have an agreement to pay the IRS. IRS business rules say that a tax lien won’t be filed if you owe less than $10,000. But the IRS reserves the right to file a lien to protect its interests. For example, the IRS might file a lien in the case of a pending bankruptcy or if the IRS thinks you’re getting rid of assets to avoid payment.
Even if you owe more than $10,000, you can still avoid a federal tax lien filing. If you can’t pay the tax right away, the best ways to avoid a lien are to request an extension of time to pay of up to 120 days or get a streamlined installment agreement to pay the full balance.
Streamlined installment agreements require you to pay the full balance within six years or before the collection statute of limitations expires, whichever is sooner. If your balance is less than $50,000, or if you can pay the balance down to less than $50,000 before establishing the streamlined installment agreement, you can avoid a tax lien.
If your unpaid balance is between $25,000 and $50,000, the IRS won’t file a tax lien if you allow the IRS to take installment agreement payments directly from your bank account or wages.
When you can’t pay your tax balance to the IRS, tax professionals with an understanding of IRS rules for liens and levies can help you avoid enforced collection action. The key is to be proactive in finding an agreement with the IRS that avoids liens and levies.
Learn your options when you want to avoid liens and levies. Or get help from a trusted IRS expert.
