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Originally Posted On : https://solutions.tax-guard.com/resources/post/is-a-federal-tax-lien-the-same-as-a-levy/
Once a federal tax liability is assessed, you are on the clock. There is a risk the IRS will begin actively collecting against you, your business, or both. It is important to understand the differences between two basic IRS collection tools – the lien and levy – and the implications for your business.
What is a tax lien?
A federal tax lien serves three main purposes. It provides notice of your personal or business tax liability to third parties (including your lender). It secures the government’s interest in your business’s assets (real and personal property). And it establishes priority relative to other secured interests.
Implications of a Federal Tax Lien
Before a bank, asset-based lender, or factoring company will lend money to your business (or you), the lender will do a public record search. The public record search will reveal federal tax liens. If a federal tax lien is found, the lender may not fund. When lenders fund, they file a lien to secure their interest. A security interest is an enforceable legal claim on collateral pledged by the borrower. Common forms of collateral are:
- real property
- equipment
- inventory
- and receivables.
A federal tax lien threatens the lender’s priority on its secured interest(s). When the IRS files a lien, the IRS’s secured interest can jump ahead of the lender’s for revolving assets, i.e., inventory and receivables. When lenders fund in second position, the IRS can levy or hijack the collateral (see discussion below) so that the lender is not recouped on its advances.
Risk of a Federal Tax Lien – No Warning
Once a liability exists, the IRS can file a federal tax lien at any time thereafter. The IRS does not need to provide notice before issuing a lien. It is much easier to prevent the IRS from filing a federal tax lien than removing a lien once filed.
Levy: What is it?
A levy is essentially the same as a seizure – it takes an asset. The most common levies attach to bank accounts and receivables, but the IRS can also seize inventory, equipment, real property, etc. A bank levy attaches to any funds in your or your business’s bank account(s) at the time the bank processes the levy. Any funds in the account are held by the bank and remitted to the IRS 21 days after the bank processes the levy. When the IRS levies accounts receivable, they send a letter to your customer(s) (also called “debtor(s)”) instructing them not to pay you or your lender. Instead, the customers/debtors remit payment to the IRS based on the terms of the invoice, e.g., on day 30 if the terms are net 30. Essentially, the IRS hijacks the funds.
Risk of Levy – Warning
Before levying bank accounts or receivables, the IRS must first issue a final notice of intent to levy. The IRS typically issues several notices of intent to levy during the collection process. General notices of intent to levy do not trigger or predict collection. Instead, they are all bark and no bite. The key is to look for the word “final” in the notice. Alternatively, you could look at the number of the letter; Letter 1058 or LT11 are final notices of intent to levy. Absent some intervening action to protect assets, the IRS’s rules allow it to begin issuing levies 30 days from the date of the final notice.
Avoid an IRS Business Lien or Levy By Being Proactive
It is much easier to prevent an IRS lien or levy than to remove a lien or release a levy after the fact. The IRS trains its Revenue Officers to file the federal tax lien and final notice of intent to levy early in the process. And they frequently do, even before speaking with the business. The IRS doesn’t care about the implications of these collection actions on either you, your business, or both.
The only sure way to prevent a federal tax lien or levy is to avoid owing taxes. However, if you owe money to the IRS, Tax Guard can help. We protect our clients from the negative impacts of federal tax liens and levies throughout our resolution process. Don’t wait for the IRS to ruin your day. Let Tax Guard proactively resolve the issue.
When federal tax issues arise, don’t wait for the IRS to file a tax lien or issue levies. Be proactive. It’s best not to try to deal with the IRS on your own. Fill out the form below to speak with a specialist about how we can help.
