If you owe back taxes, the IRS has ways to collect the money you owe. Two important terms you might encounter are “tax lien” and “tax levy.” Although people sometimes use these terms interchangeably, they represent different actions with different outcomes.
Understanding tax lien and tax levy differences can help you take action to resolve the disruptions they can cause to your financial life. At Creative Tax Solutions, we help people make sense of tax problems and regain control of their finances.
What Are IRS Tax Liens?
When you have outstanding tax debt, the IRS uses a tax lien to collect your debt. A tax lien is the government’s legal claim on your assets – your property, vehicles, or even your business accounts. It serves as a public warning that you owe money to the IRS. While a tax lien doesn’t mean immediate seizure of your property, it’s the first step in a process that can lead to aggressive collection actions.
How Does a Tax Lien Happen?
The process starts after the IRS assesses your tax liability (the amount you owe) and sends you a Notice and Demand for Payment. If you don’t pay the debt in full or work out a payment arrangement, the IRS can file a Notice of Federal Tax Lien. This document becomes a public record, alerting potential lenders and creditors to your unresolved tax debt. It makes it much harder to get loans, refinance your mortgage, or sell assets.
Additionally, a tax lien can negatively impact your credit score, affecting your financial options for years to come.
What Are IRS Tax Levies?
While a tax lien places a claim on your assets, a tax levy represents a much more severe scenario. A tax levy means the IRS forcefully seizes your property to satisfy the tax debt you owe. This can cause immediate financial hardship and disruption to your life.
The IRS can levy a wide range of assets. The most common form is wage garnishment, in which the IRS takes a portion of your paycheck each pay period. The IRS can also seize funds from your bank accounts, collect your Social Security benefits, and even target your retirement accounts. In some cases, the IRS can levy physical property like your home or vehicles.
The tax levy process usually involves several notices. Before forcefully seizing assets, the IRS typically sends you a Final Notice of Intent to Levy, giving you a final opportunity (usually 30 days) to resolve the debt.
If you don’t respond or arrange a solution, the IRS can proceed with the levy. However, while the 30-day notice is standard, there are situations where the IRS can levy your assets with less warning, such as in cases of unpaid employment taxes.
Key Differences Between a Tax Lien and a Tax Levy
Public Record
A tax lien is a matter of public record when the IRS files a Notice of Federal Tax Lien. This document becomes visible to potential lenders, creditors, and even employers, and can hurt your creditworthiness. It makes it difficult to obtain financing, as it signals to lenders you have unresolved tax debts.
On the other hand, a tax levy is not filed as a public record. However, its financial consequences can still indirectly damage your credit score if the seizure of assets makes it harder to pay your bills on time.
Impact on Credit
A tax lien has a direct and often lasting negative impact on your credit score. It becomes a red flag for lenders, making it difficult to secure loans, mortgages, lines of credit, or even get favorable interest rates.
While a levy doesn’t appear directly on your credit report, it can have a ripple effect. If the IRS seizes a significant portion of your paycheck or bank funds, you might struggle to meet other financial obligations, leading to missed payments and damaging your credit history.
Severity of Consequences
Tax liens and levies are serious, but a levy often creates a more immediate financial crisis. A lien makes obtaining financing difficult and negatively impacts your credit score for years. Meanwhile, a levy involves the immediate loss of your assets.
The IRS can garnish your wages, drain your bank accounts, or even seize your property, leading to financial hardship and disrupting your ability to meet your basic needs.
How Tax Liens and Levies Can Affect Your Spouse
When a tax lien or levy strikes, the financial consequences extend beyond the person incurring the tax debt. Your spouse’s financial stability can also be affected, and the severity depends on several factors, including your tax filing status and the laws of your state.
Joint vs. Separate Tax Filings
Tax liens and levies can have implications for you and your spouse. When you file taxes jointly, both spouses are jointly responsible for any outstanding tax debt. This means that if one spouse has unpaid taxes and a tax lien or levy is imposed, both individuals can be held accountable for the debt. Joint filing exposes both spouses to the consequences of liens and levies, potentially impacting their assets and financial stability.
Separate Filings and Limits of Protection
Choosing to file taxes separately can provide a potential advantage in terms of limited liability. When each spouse files separately, they are solely responsible for their tax liability. This means that if one spouse accrues tax debt and faces a tax lien or levy, the other spouse may not be held liable for that particular debt. Filing separately can be a strategic move to protect the assets of one spouse from potential liens and levies resulting from the tax issues of the other spouse.
Community Property States
In community property states like Florida, community property laws consider property acquired during the marriage to be jointly owned by both spouses, regardless of who earned it. This means that if one spouse accumulates tax debt and the IRS imposes a lien or levy, the jointly owned property, including assets acquired by both spouses, becomes vulnerable to seizure or encumbrance.
Even if one spouse diligently fulfills their tax obligations, they can still be at risk due to their partner’s tax issues. Community property laws encourage both spouses to be aware of the potential consequences and take appropriate steps to protect their joint assets.
Strategies for Protection
To protect assets in community property states like Florida, you can establish a legally binding agreement that designates certain assets as separate property. This agreement helps shield these assets from being subject to a tax lien or levy, as they are considered individually owned.
One effective strategy is to create a trust and transfer your assets to it. This provides an extra layer of protection against seizure or encumbrance. You need to consult experienced tax professionals who can ensure that these strategies are implemented correctly, following the specific rules and regulations of community property states. This way, you can have the best protection for your assets.
Options for Dealing With Tax Liens and Tax Levies
Paying in Full
You can resolve a tax lien and prevent a levy by paying the full amount owed to the IRS. This action eliminates your tax debt and stops further collection actions.
Installment Agreements
If you can’t pay the full amount upfront, negotiating a payment plan with the IRS is an option. With an installment agreement, you make regular monthly payments until the tax debt is fully repaid.
Offer in Compromise
If paying the full amount is not possible, you might qualify for an offer in compromise. This option allows you to settle your tax liability for less than what you owe by considering your financial situation.
Innocent Spouse Relief
If your spouse’s actions led to tax issues, innocent spouse relief can protect you. This provision absolves spouses unaware of their partner’s tax problems or unfairly held responsible for tax debt.
Seeking Professional Help
Turning to experienced tax professionals, like those at Creative Tax Solutions, can help you navigate the complexities of tax liens, levies, and other tax issues. They will assess your situation, strategize a plan, and guide you through the process.
Acting promptly and seeking assistance when facing tax problems can lead to a favorable resolution and protect your financial stability. Tax experts at Creative Tax Solutions can assess your specific situation, advocate on your behalf with the IRS, and help you identify the best path forward.
Proactive Steps To Avoid Tax Liens and Levies
To prevent tax liens and levies, take proactive steps that ensure compliance with tax laws and protect against collection action by the IRS. Follow these strategies:
File and Pay Taxes on Time
Make it a priority to file and pay your taxes by the designated deadlines to avoid penalties and interest. Timely compliance reduces the risk of IRS collection actions.
Communicate With the IRS
Open and read all IRS notices and letters promptly. Responding promptly demonstrates your willingness to address any tax issues. Ignoring notices increases the likelihood of facing severe collection actions, including liens and levies.
Consider Professional Tax Preparation
Hiring a professional tax preparer can help ensure accuracy in your tax filings. Their expertise reduces the chance of errors or omissions that might trigger an IRS notice of deficiency and initiates collection actions
Tax Lien or Levy? Get the Help You Need
Understanding tax lien and tax levy differences is the first step towards regaining control of your financial situation. These tax collection actions can have serious consequences, but knowing your options empowers you to protect yourself.
Remember, you don’t have to deal with tax issues alone. The tax professionals at Creative Tax Solutions offer compassionate and expert guidance through every stage of resolving your tax debt. We offer a confidential and judgment-free space to evaluate your situation, negotiate with the IRS on your behalf, and advocate for solutions that protect your financial future.
Frequently Asked Questions
Is Florida a tax lien state?
Yes, Florida is a tax lien state. This means the IRS can file a tax lien to secure its claim on your property if you fail to pay your taxes.
How do tax liens work in Florida?
The IRS begins the tax lien process in Florida by assessing your tax debt and sending you a bill. If you don’t pay, the IRS may file a Notice of Federal Tax Lien, making your debt public record. This lien can hinder your ability to get loans, refinance, or sell assets, and it will damage your credit score.
Where are federal tax liens filed in Florida?
Federal tax liens are typically filed with the Clerk of the Circuit Court in the county where you reside.
How long is a tax lien in Florida?
A federal tax lien generally remains in effect for ten years from the assessment date. However, the IRS can refile to extend its duration. After proper notice, the IRS can also choose to release the lien or withdraw the Notice of Federal Tax Lien under specific circumstances.
Does Florida do tax lien certificates?
Yes, Florida participates in tax lien certificate sales. If property taxes on your real estate are unpaid for a certain period, the county tax collector can sell a tax lien certificate to an investor. This gives the investor the right to collect the delinquent taxes (and interest), and if you can’t repay them, they can initiate foreclosure proceedings on your property.