Summary: The most important issue in understanding liens, levies, garnishments, and seizures is to understand what each term means. They are interrelated in that they all are part of the Internal Revenue Service’s collection process.
Lien (aka Federal Tax Lien)
A tax lien is the government’s formal legal claim against property. A federal tax lien will exist and be filed in the public record after the IRS assesses the tax, sends a bill, and the taxpayer then fails or refuses to pay the debt in a timely way (or fails to make an arrangement to pay.)
The lien is essentially a notice to the world that the IRS is owed money and that the IRS has a legal claim against property a taxpayer may intend to sell or transfer. The lien continues until the debt is paid, compromised, discharged, or the running of the Collection Statute Expiration Date.
Property Subject to Liens
A tax lien encumbers all property owned by a taxpayer, both real and personal. This means any real estate owned, even if it’s a primary residence; any interests in land, timber, minerals; or any other types of real estate.
Personal property includes everything else, such as motor vehicles; household goods and appliances; investments, including retirement accounts or savings; or anything else imaginable. The tax lien not only applies to property owned at the time the lien is filed, but any property acquired afterward.
Protection for Certain Interests
Under US Code section 6323(b), certain validity and priority are established against certain persons. These protections apply even though the notice has been filed. There are many protections for entities, which will not be listed exhaustively in this section, but the most relevant deal with motor vehicles and real estate.
Motor vehicle
If a 3rd party purchases a vehicle from a taxpayer who has had a tax lien filed against them and the 3rd party did not have “actual knowledge” of the tax lien, the lien shall not be valid as to that property, provided the 3rd party does not relinquish the vehicle back to the taxpayer. A taxpayer cannot “sell” a car to a friend, get the car back, and then drive the car and skip out on the tax lien as to the car.
Real estate
A purchase-money mortgage (the mortgage used to purchase the home) takes priority over a previous-filed tax lien. Furthermore, mechanic’s liens, property taxes, and other instruments can take priority as well.
Levy, Garnishment, and Seizure
While a lien can be characterized by the IRS providing formal, recorded notice to the taxpayer, a levy can be characterized by action against the taxpayer. In the form of a Notice of Intent to Levy, the IRS tells the taxpayer that they intend to seize property in the near future.
Typically, the IRS levies a bank account or other property (they take the funds). Note that when the IRS seizes wages, it is referred to as garnishment.
Executing a levy
As mentioned above, the IRS may levy all property and rights to property of the taxpayer. A written notice must precede the levy be at least 30 days. The notice may be given to the taxpayer in person, at their place of business, or by certified mail to the last known address. No court permission is necessary for the IRS to levy. One exception is if the taxpayer is in an active bankruptcy. The levy of a principal residence must be approved by a federal district court judge.
Exemptions from levy
There are a number of property types that are exempt from levy. Some of these include clothing, fuel, personal effects, tools of the trade, unemployment benefits, certain annuities and pensions, workmen’s compensation, child support, minimum amount of wages, etc. However, some of these items, such as unemployment benefits, worker’s compensation, and others can be approved for levy but limited in the amount.
Continuous levy (garnishment)
The levy (garnishment) of wages will go on continuously until released. The IRS can garnish wages or salary down to the equivalent of the standard deduction for the tax filing status, plus the total allowed personal exemptions, divided by 52.
Seizures
This form of collection rarely happens and only in extreme situations. The most common instance of a seizure of property taking place is if the taxpayer has ignored the IRS outright or perhaps some other extenuating circumstance has taken place. In the event of a seizure, a Revenue Officer will take control of the property, determine its value, advertise, and auction the property.
Effect of Offer in Compromise or Installment Agreements
The submission of an Offer in Compromise or Request for Installment Agreement does not affect a tax lien. In the case of an Offer in Compromise, the lien will remain until the Offer is accepted and the amount is fully paid. While an Offer in Compromise or Installment Agreement request is pending, the IRS may not levy against a taxpayer’s property. If either is ultimately rejected, the levy will remain “paused” for 30 days. Further, if the taxpayer requests an appeal of the rejection, the levy will remain “paused”, provided that the appeal is filed within 30 days of the initial rejection.
Resolving Tax Debt
Consult an attorney about your options to help you take back control in the event of a lien, levy, garnishment, or seizure. The government is a powerful creditor but taxpayers have rights. Taxpayers also have some very good tax resolution options available. A knowledgeable attorney can help stop the chaos and recommend the best course of action to preserve as many assets and as much income as possible. We are not accepting new tax cases. If you are considering bankruptcy to resolve your tax issues, contact us.