If you owe the IRS money and arrangements are not made for payment, eventually you are likely to see one or more tax levies and be impacted by the filing of a tax lien. What is the significance of these two collection activities? Let’s start with some basic definitions. A tax levy is the means by which the IRS compels someone (typically a bank) that is in possession of the taxpayer’s property to turn that property over to the IRS. A tax lien is the means by which the IRS encumbers property owned by the taxpayer (most importantly real property) and establishes its position as a secured creditor in relation to other creditors of the taxpayer. A tax levy is either mailed or hand delivered to the person/bank that has the taxpayer’s property. A tax lien (which technically arises automatically when a tax is due) is asserted by the filing of a Notice of Federal Tax Lien in the county clerk’s office where the taxpayer resides.
So which of these collection devices is most significant? It depends. In my estimation, the tax levy is the more powerful and disruptive tool as it requires the third party holding the taxpayer’s property to turn that property over to the IRS in rather short order. But if the third party doesn’t have any property of the taxpayer when the levy is served, then the tax levy has no effect. One good thing about a tax levy is that it is not a public action. That is to say, no one other than the third party is ever made aware of the fact that the taxpayer owes money and that collection activity is underway.
A notice of federal tax lien, on the other hand, is a very public act. When a notice of federal tax lien is filed, all the world is now on notice of the unpaid tax debt. The taxpayer’s credit will immediately be impacted because credit agencies, lenders, and other financing services will see the tax debt when searching the county records where the taxpayer resides. Notwithstanding these negatives, a tax lien does not require the taxpayer (or anyone else) to do anything with the property encumbered by the lien. The filing of the tax lien notice simply secures the debt.
So which is worse? There is no right answer to that question; both are very powerful tools in the IRS’ arsenal of collection devices. There are ways to navigate around, or in spite of, a tax lien and tax levy but it is always best to avoid them if possible. If you are facing collection issues with the IRS, the assistance of an experienced tax practitioner may help you do just that.