People who owe taxes have to deal with collection efforts made by the government. This often starts with demand letters and similar measures, but those efforts can increase to tax liens and levies if the debts remain unpaid.
Tax liens and levies operate in different ways, but they can both have distinct impacts on a taxpayer’s finances.
Tax lien
A tax lien is a legal claim against a person’s property when they fail to pay a tax debt. The lien on the property protects the government’s interest in that specific property. It can be placed on financial assets, real estate and any other personal property.
Once a lien is in place, it becomes public record, which can negatively affect the person’s credit rating and make it challenging to sell or refinance your property. This doesn’t give the government possession of the property, but it should be considered a serious warning about the tax debt.
Tax levy
When a levy is issued, the government can actually seize the property to satisfy the tax debt. This might involve garnishing wages, withdrawing funds from bank accounts or even taking physical assets like a car or home. Unlike a lien, which is a claim, a levy results in the actual taking of property to cover the debt.
The only way to avoid tax liens or levies is to address tax debts swiftly. This means the person should read all notices that are sent from state or federal tax agencies. In some cases, making payment plans or trying to set up an offer in compromise may be beneficial.