Tax Lien, Levies, & Garnishment

Many individuals have trouble understanding the differences between a tax lien, a tax levy, and garnishments.

The one similarity among all three is that each is a mechanism the IRS uses to collect past-due taxes.

The similarities and differences among the three mechanisms are subtle yet distinct. 

Here is a quick summary:

Tax Levy

With a tax levy, the IRS seizes something of value to an individual. The IRS can seize physical assets, bank accounts, or wages (called a garnishment).

A levy against a person's assets involves the seizure of an asset on a particular date. The levy allows for seizure only of property owned as of that date (i.e., not assets acquired after that date). 

For example: 

Day 1 : You put $100 in a bank account.

Day 2 : The IRS places a levy against your bank account. 

Day 3 : You put another $75 in the bank account. 

The IRS bank account levy has no effect on the $75 you deposited on Day 3. The levy on Day 2 allows for the seizure of only the $100 that was in the account on that day. The money you deposited on Day 3 is exempt from the levy.

That said, the IRS can place another levy if it wants to do so. However, a second levy is required after Day 2. Of course, as with many tax rules, an exception exists, allowing for the automatic repeat of levies related to wages. This is called a garnishment.

Garnishment

Garnishment of wages is a levy (i.e., a seizure) of your wages that repeats itself every time you get paid. Basically, the IRS forces your employer to withhold the garnishment and forward it to the IRS. 

There are limits on the amount the IRS can garnish; however, those limits still leave the taxpayer with little left over to pay for normal living expenses. The garnishment will remain active against all future paychecks until you pay the full tax you owe. Want an estimate of how much of your paycheck will be garnished? Schedule a free consultation today. 

There are a few ways to stop a wage garnishment:

• Enter into good standing with the IRS (by paying your back taxes in full). 
• Enter a tax payment plan or some other type of resolution. 

A tax attorney can help determine which options are available to you. Schedule a free consultation today. 

Tax Lien

A tax lien is different from a tax levy or garnishment. Through a tax lien, the IRS makes a legal claim to your property as security for a tax liability. This legal claim (i.e., your outstanding tax debt) attaches to your real or personal property as collateral until you pay your outstanding taxes.

Unlike with a tax levy (in which the IRS seizes assets), with a tax lien the IRS has encumbered the property (i.e., clouded the title of your property with this attachment).

A tax lien can create difficulties when you want to sell your home or refinance a mortgage. A tax lien also has a negative impact on your credit score, preventing you from borrowing money.

What can you do?

Do not ignore any letter you receive from the IRS. Instead, reach out to Faulisi Law and let us know which notice (CP) or letter (LTR) number appears on the top or bottom right-hand corner of your letter. We can tell you exactly what the letter means.

If you have a lien, you’ll want to remove it as soon as possible by getting an IRS lien release.

An even better solution is to resolve issues before the IRS levies or garnishes your assets. If you need advice, let us know. Don't guess with the IRS.

In Summary

A tax levy occurs when the IRS seizes your asset at a certain point in time. A garnishment is a type of seizure specific to wages. (It automatically reoccurs.)

Think of it this way: All garnishments are tax levies but not all tax levies are garnishments. 

A tax lien is a notice that encumbers your title and prevents you from fully using your asset. However, unlike with a tax levy, the IRS does not seize the asset.