Liens and Levies

By: Gregory D. Verdibello, Esq.

Once a taxpayer’s liability has been formally recorded on the books and records of the Internal Revenue Service (“IRS”), the IRS may use one of its collection tools to satisfy the taxpayer’s outstanding liability.  Two of the collection tools that the IRS may choose to use are a lien and levy.  Many taxpayers do not know the difference between a tax lien and a levy.  The purpose of this article is to discuss the differences between the tax lien and levy and explain how they are used to collect tax liabilities.

The IRS is given the statutory power to assert a federal tax lien under I.R.C. § 6321. The IRS’s statutory lien arises once the tax has been assessed (i.e., formally recorded by the IRS) against a taxpayer, notice and demand has been issued to the taxpayer, and the taxpayer neglects or refuses to pay the liability.  See I.R.C. § 6321.  As a matter of IRS policy, the IRS usually gives a taxpayer ten (10) days for the notification to pay the liability.  See IRM 5.12.2.2 (2005).  Liens under New York State law, such as a car loan lien, only attach to the property encumbered by the loan.  The federal tax lien is broader, as it attaches to all property and rights to property owned by the taxpayer on the date the tax is assessed, or acquired after the date of assessment.  See I.R.C. § 6321.  It is important to note that a tax lien encumbers property, and a lien does not signify an actual “taking of property.”  Although the reach of the federal tax lien is broad and extensive, the IRS only acquires the rights to property held by the taxpayer.  For example, if you own 50% of a commercial building, then the IRS’s interest is no greater than your 50% interest in the building.  Of course, the IRS’s interest cannot be greater than the amount of tax you owe.

The IRS has the right to file a federal tax lien against a taxpayer in the taxpayer’s local county records office.  The filing of a federal tax lien grants the IRS priority over certain creditors.  See I.R.C. § 6323.  However, it should be noted that the IRS does not need to file a tax lien against a taxpayer in order to begin collection action.  The filing of a federal tax lien is also reported to the credit bureaus and will have an adverse effect on a taxpayer’s credit.

The IRS does allow relief from the federal tax lien.  The IRS will release a tax lien if: (1) The taxpayer fully satisfies the liability; (2) the liability is unenforceable (passage of time or invalid assessment); or (3) the taxpayer posts a bond which guarantees full payment. See I.R.C. § 6325(a).  The IRS can discharge the tax lien in regard to a specific piece of property (e.g., real property) if: (1) The value of the taxpayer’s other property is at least twice the value of the tax liability; (2) the taxpayer payers the IRS an amount equal to the value of the tax lien filed against the said property; (3) the IRS’s interest is valueless; or (4) the taxpayer sells the property and the proceeds of the sale are substituted and encumbered.  See I.R.C. § 6325(b).  The IRS can subordinate its interest to another lien holder if: (1) The taxpayer pays an amount equal to the amount of the lien or interest to which the certificate subordinates the tax lien; or (2) the amount of the tax that is ultimately collected from the property will be increased and facilitated by the issuance of the Certificate of Subordination.   See I.R.C. § 6325(d).  Finally, the IRS can withdrawal (i.e., as if the lien was never filed) a tax lien if: (1) The filing of the notice was premature or otherwise not in accordance with the administrative procedures of the IRS; (2) the taxpayer has entered into an installment agreement to satisfy the tax liability with respect to which the lien was filed; (3) the withdrawal of the lien will facilitate collection of the tax liability; or (4) the withdrawal of the lien would be in the best interests of the taxpayer (as determined by the Taxpayer Advocate) and of the Government.  See Taxpayer Bill of Rights 2.

Unlike a tax lien, a levy is an actual taking of property.  I.R.C. § 6331(b) states that the IRS’s levy power includes both “distraint and seizure by any means.”  There is a practical difference, however, between a levy and a seizure.  Generally, a levy is the forcible taking of funds or intangible assets belonging to the taxpayer that are in the possession of a third party.  A seizure, in contrast, is a forcible taking of real or personal property that is in the taxpayer’s own possession or possessed by a third party.  The IRS can utilize its levy power if a taxpayer has not paid any tax liability within 10 (ten) days after the IRS makes a notice and demand for payment.  See I.R.C. § 6331(c).

The IRS is required, however, to provide a taxpayer with certain notices before it can levy the taxpayer’s funds or assets.  See I.R.C. § 6331(d).  Initially, the IRS will provide “warning notices.”  These notices, entitled Notice of Intent to Levy, are given to the taxpayer to encourage the taxpayer to pay a tax liability before collection action is taken.  If payment has not been made after the taxpayer has been so warned, the IRS must then issue a Final Notice of Intent to Levy.  See I.R.C. § 6331(d).  This Notice gives the taxpayer thirty (30) days to file a Collection Due Process Appeal.  See I.R.C. § 6330.  A Collection Due Process Appeal gives the taxpayer the opportunity for a hearing to determine whether the IRS’s collection action is warranted and appropriate.  See I.R.M. 5.1.9.3.1 (2012).  Moreover, during the pendency of the appeal, the IRS’s collection activity is suspended.  See I.R.C. § 6330(e).  If the taxpayer misses the deadline to request a Collection Due Process Appeal, all is not lost.  The taxpayer may request an Equivalency Hearing within one year after receiving the Final Notice of Intent to Levy.  See I.R.M. 5.1.9.3.2.2 (2012).  Unlike a Collection Due Process Appeal, the IRS is not required to suspend its collection action during the pendency of an Equivalency Hearing.  See I.R.M. 5.1.9.3.5 (2012).  As a policy matter, however, the IRS does suspend collection action during an Equivalency Hearing in most cases.  See id.

Once the notice period has passed, the IRS can levy the taxpayer’s funds or assets.  There are two different kinds of levies.  The first is an account levy.  An account levy only reaches the money in an account when the levy is served; it does not reach money deposited into the account in the future.  See I.R.M. 5.11.5.3 (2010).  The second is a continuous levy, which is effectively a garnishment.  Continuous levies attach to all future money until the levy is released.  See id.  A levy on a taxpayer’s wages and salary is a continuous levy.  See id.  In this context, what constitutes wages and salary is quite broadly construed.  Wages and salary include fees, bonuses, commissions, and “similar items.”  See I.R.M. 5.11.5.3 (2010).

A seizure is different from a levy in that notice to the taxpayer is not required prior to the IRS’s seizing of the taxpayer’s property.  See I.R.C. § 6335(a).  Only as soon as practicableafter the seizure of the taxpayer’s property is the IRS required to give the taxpayer notice of the seizure.  See id.  This notice must provide the taxpayer with the time, place, manner, and conditions of the sale of the seized property.  See I.R.C. § 6335(b).

Certain property is exempt from IRS levy and seizure.  See I.R.C. § 6334.  This includes a portion of a taxpayer’s W-2 wages equal to their standard deductions plus deductions for personal exemptions, divided by 52.  See I.R.C. § 6334(d)(2).  The IRS does not consider state exemptions.  See id at § 6334(c).  When determining a taxpayer’s exemptions, only the IRS’s exemptions apply.  See id.  The IRS’s exemptions are enumerated at I.R.C. § 6334.

The differences between a federal tax lien and levy are important to understand.  Both are collection tools used frequently by the IRS to collect outstanding tax liabilities.  Knowing the difference between the two terms will help taxpayers understand their rights and their IRS collection exposure.

Disclaimer

This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.

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