When taxpayers fall behind on their federal tax obligations, the IRS has powerful tools at its disposal to secure and collect the debt. Two of the most significant collection mechanisms—tax liens and tax levies—are frequently confused, yet they function quite differently and carry distinct consequences for taxpayers.
This guide explains the fundamental differences between liens and levies, examines how each affects taxpayers, and outlines the options available for addressing these collection actions. Understanding these distinctions helps taxpayers respond appropriately when facing IRS collection efforts.
Individuals with outstanding tax debt, business owners dealing with IRS collection notices, and anyone seeking to understand their rights during the collection process will find practical guidance for navigating these situations.
Understanding the Core Difference
The essential distinction between a tax lien and a tax levy lies in their function: a lien is a legal claim against property, while a levy is the actual seizure of property.
Tax Lien: A legal claim the IRS places on a taxpayer’s assets, establishing the government’s right to those assets as security for tax debt. The lien does not take property—it protects the government’s interest in property the taxpayer owns.
Tax Levy: The actual seizure of assets to satisfy tax debt. A levy takes property, converting it to payment against the amount owed.
Think of the difference this way: a lien is the IRS saying “we have a claim on your property,” while a levy is the IRS saying “we are taking your property.”
Both mechanisms arise from the same underlying issue—unpaid taxes—but they operate differently and require different responses.
Federal Tax Liens Explained
A federal tax lien arises automatically when a taxpayer fails to pay a tax debt after the IRS assesses the tax and sends a notice demanding payment. This “statutory” or “silent” lien attaches to all of the taxpayer’s property and rights to property, including property acquired after the lien arises.
How a Tax Lien Arises
The lien process follows these steps:
- The IRS assesses a tax liability
- The IRS sends a bill (Notice and Demand for Payment)
- The taxpayer fails to pay the full amount within 10 days
- The lien automatically arises under federal law
At this point, the lien exists but is not public. The IRS may then choose to file a Notice of Federal Tax Lien (NFTL), which makes the lien a matter of public record.
Notice of Federal Tax Lien
The NFTL is filed with the county recorder or secretary of state, putting other creditors on notice of the government’s claim. This filing:
- Becomes public record
- Establishes priority over later creditors
- May appear on credit reports
- Affects ability to sell property
- Can impact business operations and borrowing
The IRS generally files an NFTL when the unpaid balance exceeds $10,000, though this is not a hard rule. Filing may occur at lower amounts based on circumstances.
Before filing an NFTL, the IRS sends Letter 3172 (Notice of Federal Tax Lien Filing and Your Right to a Hearing), informing the taxpayer of the filing and appeal rights.
What a Tax Lien Affects
A federal tax lien attaches to:
- Real property (homes, land, commercial property)
- Personal property (vehicles, equipment, jewelry)
- Financial assets (bank accounts, investments, retirement accounts)
- Accounts receivable and business income
- Future assets acquired while the lien is in effect
The lien does not immediately freeze or seize these assets—that requires a levy. However, the lien creates complications when attempting to sell property or obtain credit.
Credit Impact
While the three major credit bureaus no longer include tax liens on credit reports (as of 2018), the practical effects on creditworthiness remain:
- Lenders often check public records directly
- Mortgage applications typically uncover liens
- Business financing becomes more difficult
- Professional licensing may be affected
- Security clearances can be impacted
Tax Levies Explained
A levy is the IRS’s mechanism for actually taking property to satisfy tax debt. Unlike a lien, which is a claim, a levy is an action—the seizure of assets.
Types of Levies
The IRS can levy various types of property:
Bank Account Levy: The IRS sends a notice to the bank, which must freeze the account and send available funds to the IRS after a 21-day holding period.
Wage Garnishment: A continuous levy on wages that remains in effect until the debt is paid, the levy is released, or the collection statute expires. The IRS must leave the taxpayer a small exempt amount based on filing status and dependents.
Accounts Receivable Levy: For self-employed individuals and businesses, the IRS can levy payments owed by clients and customers.
Social Security Levy: The IRS can levy up to 15% of Social Security benefits.
Property Seizure: In rare cases, the IRS seizes physical property such as vehicles, equipment, or real estate for sale at auction.
Notice Requirements Before Levy
Before issuing most levies, the IRS must provide specific notices:
- Notice and Demand for Payment: Initial bill sent after assessment
- Collection Notices: The IRS typically sends several notices over time (CP14, CP501, CP503, CP504)
- Final Notice of Intent to Levy: At least 30 days before levying, the IRS must send this notice, often on Letter 11 or Letter 1058
The Final Notice provides important appeal rights. Taxpayers have 30 days to request a Collection Due Process (CDP) hearing, which temporarily stops levy action.
An exception exists for state tax refund levies—the IRS can levy a state refund after sending Notice CP504 without additional notice.
The 21-Day Bank Levy Period
When the IRS levies a bank account, the bank does not immediately send funds. Instead:
- The bank freezes the account upon receiving the levy
- A 21-day holding period begins
- During this period, the taxpayer can work with the IRS to release the levy
- After 21 days, the bank sends frozen funds to the IRS
- The levy only captures funds present at the time of the levy—future deposits are not affected
This window provides opportunity to negotiate with the IRS before losing the funds.
Key Differences Summary
| Aspect | Tax Lien | Tax Levy |
|---|---|---|
| Nature | Legal claim/security interest | Actual seizure of property |
| Effect | Protects IRS interest | Takes property |
| Timing | Arises after failure to pay | Requires additional notices |
| Public Record | Only if NFTL filed | Not public record |
| Property Impact | Cannot freely sell/refinance | Property is taken |
| Duration | Until paid, expired, or released | One-time action (except wage levy) |
| Appeal | CDP hearing rights | CDP hearing rights before action |
How to Remove a Tax Lien
Several options exist for addressing a federal tax lien.
Pay the Tax Debt in Full
The most direct solution. Once the debt is fully paid, the IRS must release the lien within 30 days. The taxpayer receives a Certificate of Release of Federal Tax Lien.
Discharge of Property
A discharge removes the lien from specific property, allowing sale or refinancing while the lien remains on other assets. The IRS may grant a discharge when:
- Proceeds will be paid to the IRS
- The IRS interest is otherwise protected
- The property has no value above secured interests
Application requires Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien).
Subordination
Subordination does not remove the lien but allows another creditor to move ahead of the IRS in priority. This can help taxpayers obtain financing that would otherwise be impossible.
The IRS may agree to subordination when the taxpayer can demonstrate that the loan will help pay the tax debt (such as refinancing a home to access equity).
Application requires submitting a request following guidelines in IRS Publication 784.
Withdrawal
A withdrawal removes the public Notice of Federal Tax Lien while the underlying lien remains in effect. Withdrawal can improve credit situations and remove the public stigma of a filed lien.
Withdrawal may be available when:
- The NFTL was filed prematurely or not according to IRS procedures
- The taxpayer enters a Direct Debit Installment Agreement and meets certain conditions
- Withdrawal facilitates collection
For Direct Debit agreements, requirements typically include:
- Balance of $25,000 or less (or paid down to that amount)
- Agreement term of 60 months or less
- Three consecutive timely direct debit payments
- Full compliance with filing and payment requirements
Expiration
The collection statute of limitations is generally 10 years from assessment. When the statute expires, the lien is released automatically. However, certain actions can extend or suspend the statute.
How to Release a Tax Levy
Stopping or releasing an active levy requires different approaches than addressing a lien.
Pay the Balance in Full
Complete payment results in immediate levy release.
Establish an Installment Agreement
Entering an approved payment plan typically stops levy action. Once an installment agreement is in place, the IRS generally will not levy unless the taxpayer defaults.
Demonstrate Financial Hardship
If the levy creates significant financial hardship—preventing payment of basic living expenses—the IRS may release it. This requires demonstrating:
- The levy prevents meeting necessary living expenses
- Financial information supporting the hardship claim
- Often, entering Currently Not Collectible status
Submit an Offer in Compromise
Submitting an OIC typically stops levy action while the offer is being considered.
Challenge the Levy as Improper
A levy may be released if the IRS:
- Failed to follow proper procedures
- Made errors in the assessment
- Violated taxpayer rights
- Levied property belonging to someone else
Request a Collection Due Process Hearing
If the Final Notice of Intent to Levy was received within the past 30 days, requesting a CDP hearing stops levy action until the hearing is resolved.
Demonstrate the Levy Was Wrongly Issued
If the tax was paid, the collection statute expired, or other circumstances make the levy improper, providing evidence can result in release.
Preventing Liens and Levies
The best approach to liens and levies is preventing them in the first place.
Respond to IRS Notices Promptly
Ignoring IRS notices leads to escalation. Each notice provides opportunity to address the debt before liens are filed or levies issued.
Enter a Payment Agreement
Establishing an installment agreement before collection actions begin protects against both liens and levies in most cases.
Stay in Communication
Taxpayers who communicate with the IRS and demonstrate good faith efforts to resolve their debt generally face less aggressive collection action.
File All Required Returns
Unfiled returns prevent entering payment agreements and lead to substitute returns that may overstate liability.
Frequently Asked Questions
Can the IRS levy a bank account without a lien?
Yes. The IRS can levy bank accounts without first filing a Notice of Federal Tax Lien. The lien and levy are separate collection tools. However, proper notice of intent to levy is required before most levies can be issued.
Does a tax lien affect a spouse who does not owe the tax?
A lien attaches to property owned by the taxpayer. In community property states, community property may be subject to lien for one spouse’s tax debt. In other states, only the owing spouse’s interest in jointly-owned property is typically affected.
How long does a tax lien stay on public record?
A filed NFTL remains until released by the IRS (upon payment or other resolution) or until the collection statute expires. Even after release, the filing record may remain visible in public records, though it should show as released.
Can the IRS take a primary residence?
Technically, yes—but seizing a primary residence requires court approval and occurs rarely. The IRS must demonstrate that no other reasonable means of collection exists. In practice, seizure of primary residences is uncommon.
What is the difference between a levy and a garnishment?
In the tax context, a wage garnishment is a type of levy. The IRS uses “levy” as the general term for all seizures, including wage garnishments, bank levies, and property seizures.
Key Takeaways
- A tax lien is a legal claim securing tax debt against property, while a tax levy is the actual seizure of property—understanding this distinction is fundamental to responding appropriately.
- Tax liens arise automatically upon failure to pay after notice, but filing a public Notice of Federal Tax Lien requires the IRS to provide notice and appeal rights.
- Before issuing most levies, the IRS must send a Final Notice of Intent to Levy, providing 30 days to request a Collection Due Process hearing that temporarily stops levy action.
- Multiple options exist for removing liens (payment, discharge, subordination, withdrawal) and releasing levies (payment, installment agreements, hardship demonstration, OIC submission).
- Prompt response to IRS notices and proactive communication represent the most effective strategies for preventing liens and levies from occurring.
Conclusion
Tax liens and levies represent serious IRS collection tools, but neither is insurmountable. Understanding the differences between these mechanisms—and the rights and options available—enables appropriate response when facing collection action.
Taxpayers receiving collection notices should take prompt action, whether by arranging payment, establishing an installment agreement, or exploring other resolution options. Ignoring the situation allows it to escalate from liens to levies, significantly increasing the consequences.
Professional tax resolution assistance can help taxpayers navigate collection situations, negotiate with the IRS, and identify the most appropriate strategy for their circumstances. Early intervention typically produces better outcomes than waiting until collection actions are already underway.
