What Does That Mean? What Should I Do Now?

If the IRS sends you a notice saying that your account is in jeopardy of a lien or levy, you need to act quickly to protect your finances. A lien is a legal claim to your assets, and a levy is when the IRS starts taking your assets.

If you owe back taxes, it’s crucial to understand these two collection actions and how to stop them. This article outlines what liens and levies are, the different notices the IRS sends about these actions, and how to stop them from moving forward.

Let’s break it down.

Key Takeaways

  • Lien vs levy – Liens are legal claims on your assets, and levies liquidate what you own.
  • Responding to IRS notices is key – Doing nothing will cost you in the long run.
  • Prevent future liens and levies – Make payment arrangements on tax debts and plan ahead to avoid new tax liabilities.

What Is an IRS Tax Lien?

Think of a tax lien as the IRS’s way of putting a claim on your property. It’s like planting a flag and saying, “This person owes us money, and we have first dibs on the money if they sell their stuff.”

Here’s how it works:

If you owe the IRS and don’t pay or make arrangements to settle your debt, they can file something called a Notice of Federal Tax Lien. This lien doesn’t mean the IRS is taking your property—yet. Instead, it secures their interest in your property. That means if you sell your house, car, or other assets, the IRS gets paid before you see a dime.

The lien can attach to:

  • Real estate, like your home, land, or investment properties.
  • Personal property, like cars, jewelry, or equipment.
  • Financial assets, like bank accounts and investments.

Even if the property isn’t physically taken, the lien clouds your title, making it difficult to sell or refinance anything you own.

Example of the Tax Lien Process

Let’s say Sarah, a small business owner, owes $50,000 in back taxes from several years of underreported income. She’s ignored letters from the IRS and hasn’t tried to set up a payment plan. One day, she receives a “Notice of Federal Tax Lien” in the mail.

Now, that lien is attached to her business assets, her personal car, and even her house. If Sarah tries to sell her house, the IRS will take what she owes from the sale proceeds.

How Do Tax Liens Impact Your Life?

A tax lien can make your financial life harder. For one, it can seriously hurt your ability to take out loans. Although the IRS no longer reports liens to the three major credit bureaus (as of 2018), the lien is a public record. This means lenders, landlords, and others can still find out about it during background checks. The lien can prevent you from qualifying for loans or refinancing.

Additionally, liens don’t necessarily disappear if you declare bankruptcy. The IRS’s claim on your property sticks around until the debt is resolved. Note that filing bankruptcy may allow you to discharge some but not all tax debts – there are very specific rules on tax debt and bankruptcy.

What Is an IRS Tax Levy?

While a tax lien is more of a “warning” that the IRS has a legal claim to your property, a tax levy is when they actually seize your property to pay off the debt. Think of a levy as the IRS taking action after giving you plenty of chances to pay.

A levy allows the IRS to take money or property directly from you. Here are some ways they might do this:

  1. Bank Levies: The IRS can freeze and take money directly from your bank account. Once they notify your bank, you usually have 21 days to resolve the issue before the money is gone.
  2. Wage Garnishment: The IRS can contact your employer and require them to send part of your paycheck to the IRS until your debt is paid.
  3. Seizure of Physical Assets: This is rare, but the IRS can take your house, car, or other valuable items and sell them to pay your debt.
  4. Levies on Social Security: If you receive Social Security or certain types of pensions, the IRS can garnish a portion of those too.

Example of a Tax Levy Notice

Now imagine John, who owes $15,000 in unpaid taxes from several years ago. He’s been receiving warning letters from the IRS but keeps ignoring them. One day, he receives an intent to levy notice that informs him of his right to a hearing. He ignores the notice, even though it clearly says that his assets are in jeopardy of levy if he doesn’t appeal or make payment arrangements in 30 days.

A little over a month later, he goes to check his bank account and notices $3,000 is missing. His bank tells him the IRS issued a levy and froze his funds. John is shocked because he didn’t realize the IRS could do that. He also starts receiving smaller paychecks because the IRS has begun garnishing his wages.

These are the types of collection actions that can happen if you ignore IRS notices. Once the IRS has initiated the levy, it can be very difficult and sometimes impossible to reverse. If John had contacted the IRS when he first started receiving notices, he could have set up monthly payments and avoided the bank levy and wage garnishment.

Why Receiving Notice of a Tax Lien or Levy Matters

If you receive a notice that your account is in jeopardy of lien or levy, the IRS is letting you know that they are giving you a final warning that they will be collecting the taxes that have gone unpaid. Moving quickly after receiving notice may help prevent your property from being earmarked for the government or from being seized outright.

Notices That Include Jeopardy of Tax Lien or Levy

If your account is at risk of a lien or levy, you may receive the following types of notices.

  • CP14 – Balance Due Notice

This letter serves as an initial notice informing you of a tax amount owed. To take care of your account without further escalation, you will need to pay the amount due to prevent further collection actions, such as liens or levies.

  • CP503 – Second Notice of Unpaid Taxes

This is a second warning that you have an outstanding tax balance and is a warning that your account is nearing “jeopardy of lien or levy” status. To take care of your account, you will need to pay the amount due or contact the IRS to discuss payment options. The IRS will send you an additional notice before moving forward with a levy.

  • CP504 – Final Notice (Intent to Levy State Tax Refunds)

The final notice lets you know that the IRS is about to take action and will be placing a levy on your state tax refund to take care of unpaid taxes. The IRS may be escalating their collection activities to perhaps filing a Notice of Federal Tax Lien. If you do not immediately pay the amount due, or contact the IRS to arrange a payment plan, they will carry on with their collection efforts.

  1. LT11 / Letter 1058 – Final Notice of Intent to Levy and Your Right to a Hearing

This is the last warning that the IRS will be going after your assets, including your wages and bank accounts. Now, you have one final chance to request a Collection Due Process hearing with Form 12153 or resolve your tax liability to prevent the levy.

  • CP90 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing

This is a final warning and shows that the IRS intends to levy certain assets, such as Social Security benefits. Similar to LT11, you can request a CDP hearing within 30 days. To respond, you will need to submit Form 12153 to request a hearing or resolve the debt to avoid levy action.

What Triggers a Lien or Levy?

The IRS doesn’t just hit you with a lien or levy out of nowhere. They follow a process, giving you time to address the situation before taking drastic measures. Here’s what typically happens:

  1. Tax Assessment: First, the IRS assesses your tax debt after you file (or fail to file) a return. The IRS may also assess taxes if an audit reveals that you owe more than shown on your tax return.
  2. Notice and Demand for Payment: You’ll receive a bill explaining how much you owe.
  3. Failure to Pay: If you don’t pay the bill or contact the IRS to arrange a payment plan, they start to consider taking action. They will also apply penalties and interest to your account.
  4. Notice of Intent to Levy: Before the IRS levies your property, they must send you a notice called a “Final Notice of Intent to Levy and Your Right to a Hearing.” You have 30 days to respond.

Who Might Receive These Notices?

Almost anyone can end up with a lien or levy if they owe taxes and don’t resolve the debt. Here are some common situations where people might receive these notices:

  • Unpaid tax liabilities from one or more years.
  • Defaulting on a payment arrangement with the IRS–missing even one payment–can mean bad news.
  • Failure to respond to notices, particularly IRS Notices CP14, CP501, and CP503.
  • Unfiled tax returns may result in a Substitute for Return issued by the IRS. The IRS may collect on the calculated amount due.
  • Business owners who have payroll tax issues.

How Can You Respond to an IRS Lien or Levy?

The best way to avoid a lien or levy is to stay on top of your tax obligations. But even if you’re already behind on your taxes, there are steps you can take to prevent the IRS from taking drastic action:

  • Step 1 – Review the Notice Thoroughly:
      • Check for a deadline to respond (usually 30 days).
      • Verify the tax period and amount owed. Reach out promptly about discrepancies.
  • Step 2 – Pay the Balance (If possible):
      • Paying in full stops lien or levy action.
      • Use IRS Direct Pay, EFTPS, or mail in a payment.
  • Step 3 – Set Up an Installment Agreement:
      • If you cannot pay in full, request a payment plan to avoid enforcement.
      • IRS generally halts levies once the agreement is in place.
  • Step 4 – Request a Collection Due Process (CDP) Hearing:
      • If the IRS threatens a levy, file Form 12153 to appeal and stop collection until the hearing is resolved.
      • Appealing gives you time to negotiate, settle, or prove financial hardship.
  • Step 5 – Apply for Penalty Abatement or Offer in Compromise (OIC):
    • First-time or reasonable cause penalty abatement (FTA) can remove penalties.
    • Offer in Compromise (OIC) allows tax settlement for less than the amount owed but has strict financial requirements.

What to Do if a Lien or Levy Has Been Issued

Can Liens or Levies Be Removed?

Yes! Both liens and levies can be removed under certain circumstances.

  • Lien Release: The IRS will release a lien within 30 days after you fully pay your tax debt. You can also request a withdrawal of the lien from public records, which helps repair your credit.
  • Levy Release: A levy can be stopped if you pay the debt, enter into a payment plan that stipulates the levy must be released, or prove financial hardship. In some cases, you can request a levy release if it creates an unfair burden, like leaving you unable to pay for basic living expenses.

Contact the IRS immediately to stop your property from being seized or having a levy attached. You may be able to make arrangements to set up a payment plan instead of having your assets taken away. Alternatively, you may choose to pay the balance due to get rid of a lien or levy entirely.

If you’re facing a direct economic threat or are unable to resolve the tax problem through the usual IRS channels, you might be able to request help from the Taxpayer Advocate Service (TAS), an independent organization within the IRS that helps taxpayers resolve problems. TAS employees are independent of other IRS divisions, which means they act solely in the taxpayer’s best interest without prioritizing the IRS’s goals. There are also Low-Income Taxpayer Clinics (LITC) that can help qualifying taxpayers.

Alternatively, hiring a tax attorney or a CPA is another option. Both an attorney and a CPA can negotiate with the IRS for you. A tax professional can work quickly to halt any IRS action to place liens or seize your property. This may be the best option if you feel overwhelmed and need guidance on the best course of action based on your particular situation.

When to Hire a Tax Professional

You may have received multiple notices from the IRS regarding impending liens or levies on your property. You might not know what to do when you find yourself with a tax debt that exceeds $10,000. Maybe you have already had a lien placed on your house or your wages have been garnished. You might have a complex case dealing with payroll taxes or even multiple years of unfiled returns. These are all very good reasons to speak with a tax professional about your options.

Preventing Future IRS Collection Actions

To avoid putting your account in jeopardy of a lien or levy, keep these tips in mind:

  • File your tax returns on time – even if you can’t pay the full amount.
  • Self-employed or have capital gains? Make estimated payments for that income.
  • Make payment arrangements – If you can’t pay, be sure to communicate with the IRS to request a temporary payment extension.
  • Pay your installment agreement on time! Missing even one payment can reactivate a lien or levy.

Received a Notice Saying Your Account is in Jeopardy of Lien or Levy? Let our Experts Help!

Dealing with the IRS can feel overwhelming, especially when you’re facing liens or levies. But remember, these actions don’t happen overnight. The IRS gives plenty of warnings and opportunities to resolve your tax debt before resorting to drastic measures. If you’re proactive, communicate with them, and explore your options, you can avoid or resolve these situations.

Ultimately, understanding the difference between a lien (a claim on your property) and a levy (actual seizure of property) is key to navigating IRS actions. Whether you’re a small business owner, freelancer, or someone facing financial difficulties, taking steps to address your tax debt sooner rather than later is always the best move.

Contacting the professionals at Seattle Legal Services is your next step to stopping the IRS from staking a claim. Protect your property and assets–Schedule a Consultation Today.