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When you fall behind on federal taxes, it raises a terrifying question: Can the IRS take your home, freeze your bank account, or just take the money from your paycheck?

The answer is yes, in certain circumstances. But IRS collection typically has a process, and there are rights and opportunities for taxpayers to address their debt before and/or after collection efforts become a reality.

A federal tax lien is not a federal tax levy. A lien is a legal claim on property, and a levy is a seizure of property or cash to collect a tax debt.

Knowing the difference can help taxpayers prevent themselves from reacting in a way that causes problems when an Internal Revenue Service collection notice comes to their door.

A federal tax lien is a legal claim on a taxpayer’s property for an unpaid federal tax debt.

The lien is typically issued when the IRS has assessed the tax, mailed a notice and demand for payment to the taxpayer, and the taxpayer has not paid. Another tactic the IRS can use is to place a Notice of Federal Tax Lien (NFTL) into public records to inform creditors that the IRS has a claim.

The IRS doesn’t necessarily mean they’ve taken your house or emptied your bank account.

A levy is not like that. It is a seizure of property–or rights to property–for the purposes of payment of the debt. The IRS can levy:

• Bank accounts
• Wages
• Certain federal payments
• State tax refunds
• Business accounts receivable
• Vehicles
• Real estate
• Other personal property

In simple terms:

Lien = legal claim

Levy = legal seizure

How an IRS Bank Levy Works

A bank levy can have a negative impact, especially when it can limit access to funds for rent or mortgage payments, payroll, utilities, and more.

If the IRS notifies a bank or financial institution to hold funds for the levy, the bank will typically hold the funds subject to the levy. IRS procedures require the money to be held for 21 days, then passed on to the IRS.

Importantly, a typical bank levy is usually a one-off, rather than an ongoing process. Typically, it deposits the money into the bank, but not automatically into the account. Some additional levy may be required to secure later funds.

Act immediately. Consider:

• Reading through the IRS notice and the tax periods included.
• Ensuring a correct balance.
• Using the information on the notice to contact the IRS.
• Identifying eligibility for installment payment or other collection solutions.
• Giving financial details if the levy is causing an economic hardship.
• When tax issues are involved, you may need professional help in resolving your tax issues.

In certain cases, taxpayers might be able to request reimbursement for bank charges if an error by the IRS is responsible. Form 8546 may be used in a qualifying situation.

An IRS wage levy is not like a typical creditor’s garnishment.

A wage levy issued by the IRS typically does not expire but remains in effect on future wages until the levy is withdrawn, the tax debt is satisfied, or the levy is terminated due to a qualifying event.

The IRS isn’t just going to take the whole paycheck of an employee. The standard deduction is determined by federal law and is dependent on filing status, standard deduction amount, dependents, etc. The amount exempt from the levy is determined by the employer using Form 668-W, Statement of Exemptions and Filing Status.

This is unlike a bank levy, which typically collects funds that are in the bank at the time of the levy, and unlike a wage levy, which may continue to impact subsequent paychecks.

Don’t believe that the levy will go away on its own.

Review whether:

• The tax debt is correct.
• Required Notices are given.
• You have an existing payment plan in place.
• Your financial circumstances have changed.
• The levy is not allowing you to pay bills for your basic living needs.
• There may be another collection solution that could be used.

The impact of this levy may be significant if funds are reduced for family expenses.

Yes. A home, or real estate, may be subject to a levy, but it is not as easy as just putting a lien on the property.

According to the IRS, a levy may include real property, and property can be sold to settle a federal debt.

This does not mean that all taxpayers who owe taxes to the IRS are in the same danger of losing their homes to the IRS. IRS collection is based on the circumstances, the nature and value of the debt, the taxpayer’s response, legal requirements, and whether collection alternatives exist.

The IRS normally has to meet a few requirements prior to levy. These ordinarily include:

1. Assessing the tax and sending a Notice and Demand for Payment.
2. The taxpayers who fail to pay or refuses to pay.
3. In most cases, a “Final Notice of Intent to Levy” and a “Notice of Your Right to a Hearing” are issued at least 30 days prior to the levy.
4. Notifying third parties prior to contact, when required.

Exceptions and special collection procedures exist; taxpayers should carefully read the specific notice.

The IRS collection process doesn’t just apply to homes and bank accounts.

An asset or payment subject to levy may be one of the following:

• Vehicles
• Business property
• Accounts receivable
• Commissions
• Retirement income
• Some Social Security benefits
• Dividends
• State tax refunds
• Certain federal payments
• Rental income

That’s the main reason why taxpayers shouldn’t just consider their real estate ownership status. Several different sources of income or assets can be involved in a collection case.

A levy does not necessarily have to remain in place indefinitely.

The IRS requires a levy in some cases, such as when:

• The tax debt has been settled.
• It has already been three weeks since the collection period ended before the levy went out.
• The release of the levy will assist the taxpayer to pay the tax.
• The taxpayer signs an installment agreement that must be released.
• The property’s value is greater than what is due, and the release of the levy will not interfere with collection.
• The levy is an economic hardship due to the taxpayer’s inability to pay basic, reasonable living expenses.

The release of a levy does not cancel out the tax debt itself. The taxpayer may still have to make another arrangement to settle the balance.

Economic Hardship Matters

If a tax levy makes it impossible to pay a person’s essential bills, like housing, food, utilities, transportation, or required medical bills, the taxpayer should make the IRS aware of the problem right away.

The IRS will consider financial information to determine if there is an economic hardship.

The collection of DP rights

A Collection Due Process (CDP) hearing is one of the most significant safeguards that may be offered to taxpayers who are subject to a proposed levy.

In most instances, the IRS is required to send the taxpayer a notice of the taxpayer’s right to hold a CDP hearing prior to the IRS’ first attempt to levy property for each tax period. The notice provides information on how to request a hearing and the deadline.

A CDP hearing may be used by a taxpayer to address some collection issues, including proposing a collection alternative, if it is appropriate. The deadline is important. IRS and the Taxpayer Advocate Service remind taxpayers: CDP requests are typically filed within 30 days of the notice.

Taxpayers should carefully read the notice and not assume that they can respond at any time since missing the deadline will impact the type of appeal they can pursue.

Tips for Dealing with an IRS Levy or Lien

If you are receiving a collection notice from the IRS, here are some things to keep in mind:

1. Don’t ignore it

Those who don’t reply can face escalated IRS collection action.

2. Specify the exact tax periods

An IRS account might encompass several years of accounts that have various amounts or collection problems.

3. Verify the balance

Check IRS records and personal payment history for missing payments/credits.

4. Answer in time

You may have limited time to appeal to the CDP.

5. Evaluate payment options

An installment agreement, temporary collection delay, Offer in Compromise, or another option may be appropriate depending on your financial status.

6. Document financial hardship

Make the necessary expense records of income, housing, utilities, insurance, medical expenses, transportation, and other expenses.

7. Avoid the transfer of funds to conceal them

Trying to cover up or move assets to evade legal collection may also result in other legal and tax issues.

8. Consider professional representation

If the case is complicated, a tax attorney, enrolled agent, or another qualified tax professional will be able to help identify collection options and to discuss them with the IRS.

The IRS has extensive collection options, such as levying bank accounts, wages, vehicles, real estate, and other assets. However, a tax lien is not a tax lien, and an IRS balance-due notice does not mean that your property is going to be immediately seized.

The most crucial step is to address the debt and not ignore it. The IRS collection rules provide notice requirements, appeals, payment options, and the situations where the IRS will lift a levy.

When you get a Final Notice of Intent to Levy, or other serious collection notification, check the deadline right away and see if you have any options for resolution or appeal that might apply to your situation. The IRS has a general overview of the collection process in its IRS Publication 594, and the instructions and deadlines are specific to the notice you received.

1. What is the difference between an IRS tax lien and a levy?

A tax lien is the federal government’s claim against your property for the government’s assessment of unpaid taxes. A levy is the actual taking of property or funds to satisfy the debt, and a lien alone does not necessarily imply the levying of your home, your bank account, or any other asset.

2. Can the IRS take money from my bank account?

Yes. The IRS can levy your bank account on an appropriate notice pursuant to applicable law. The bank must hold the sum of money subject to levy for 21 days before sending it to the IRS, giving you time to stop the levy.

3. Can the IRS take my entire paycheck?

Generally, no. Federal law provides that some amount of your wages must be left to you, the taxpayer. The amount of your income subject to an IRS levy depends on each person’s situation based on such factors as filing status and marital status, number of exemptions, and other factors. If your wages are subject to levy, the levy can continue until it is released or otherwise terminated.

4. Can the IRS seize my home for unpaid taxes?

The IRS can potentially levy real estate, including a home, to recover the delinquent amount. However, the taxpayer is well-advised to try to determine what collection alternatives are available to satisfy the liability since seizing property is a complicated legal and practical affair.

5. What is a collection due process hearing?

A Collection Due Process hearing allows eligible taxpayers to challenge the proposed levy and the IRS’s collection of a tax debt and present their case for resolution, such as an installment agreement. The IRS grants a CDP hearing when a taxpayer requests it within 30 days of the issuance of the appropriate notice.