Back in 2009, the IRS reported that 8.2 million Americans owed the government $83 billion in unpaid taxes (including penalties and interest).
Falling behind on your taxes isn’t as uncommon as you might think. Perhaps you underpaid and didn’t have the money to pay the balance. Maybe you got too busy to file or correct your return, or a significant life event got in the way.
Regardless of what happened, the IRS’s job is to collect federal income tax. And if you don’t pay, it has tools at its disposal to collect. Those tools include an IRS tax lien, a tax levy, and wage garnishment.
What are the differences between these three processes? Keep reading to learn more about IRS collections and how to call a truce with the government.
What Is an IRS Tax Lien?
An IRS tax lien is a claim against your property made when you don’t pay your taxes on time. The government can place a lien on your financial assets, real estate, or even other personal property.
You can get the lien removed when you pay your bill or set up a repayment plan that both you and the IRS agree upon.
Even though a tax lien doesn’t siphon off your assets for good, it does impact your ability to access other services while the claim is in place. For example, you may struggle to get credit when the government files the Notice of a Federal Tax Lien. If you run a business and the lien runs against your business property, then you lose the rights to that property, which may include your accounts receivable.
When Does a Tax Lien Occur?
A tax lien is the IRS’s first port of call when a taxpayer has an unresolved tax bill and fails to respond to the agency’s previous letters.
The IRS doesn’t blindside taxpayers with a lien. You will likely receive five letters beginning around six weeks after filing your returns. The first letter in what the IRS refers to as a “notice stream” is a letter containing your tax bill and a demand for payment.
If you ignore these first five letters, the IRS can then send you a Notice of a Federal Tax Lien. The notice is filed at your courthouse and is part of the public record.
What Is an IRS Tax Levy?
A tax levy allows the IRS to take your property in a bid to begin to satisfy or settle your tax debt. The keyword here is “take.” Unlike a lien, where the IRS has a claim on your property, a levy goes one step further and actually seizes and sells it.
Your property can include your bank account, wages, or another type of physical property, such as artwork, a vehicle, or real estate.
When Does the IRS Send a Tax Levy?
The IRS always prefers either a lump-sum payment or a monthly installment agreement to issuing a levy. If you decline or fail to respond to the letters, you will receive two messages: Notice of a Federal Tax Lien and Notice of Levy.
The lien notice comes first because it represents a hold on your property. Your Notice of Levy means that the IRS will now take the property. Once you receive the intent to levy, you have less leeway in setting up a payment proposal.
What Is Wage Garnishment?
Wage garnishment allows the government to take your wages directly from your employer before they reach your bank account.
The difference between wage garnishment and a wage levy is that a levy happens once. When the IRS levies your wages, it sends a notice to the parties involved, and your employer or bank comply.
Wage garnishment is a recurring process. When the IRS garnishes your wages, it continues to take a set amount of money from your paycheck until you settle your account.
Remember that when you owe back taxes, you also pay both interest and penalties on the amount past due until you finally pay off the balance. That means that the IRS garnishes your wages until you repay the principal debt owed and all the fees.
When Does Wage Garnishment Happen?
Wage garnishment is a last-ditch effort employed by the IRS only when it exhausted other resources, and there are no other assets to consider.
As with liens and levies, you do get plenty of warning. If you fail to pay your taxes or initiate a payment plan, then you will receive a Final Notice of Intent to Levy as well as the Notice of Your Right to a Hearing. If you do not ask for a hearing or contact the IRS, wage garnishment begins 30 days after sending the letter.
It is a good idea to respond to these notices to stop the garnishment from occurring. Unlike other creditors, the IRS doesn’t need a judge’s permission to garnish your wages. Moreover, the same laws that prevent other creditors from trimming more than 25 percent of your disposable income don’t apply to the government.
The IRS can – and potentially will – leave you only with enough to pay your mortgage/rent and fixed expenses. If you have a complicated financial situation (i.e., multiple accounts, child support, or names on your parents’ accounts), you could be at risk of losing the money required to pay your bills.
Plus, the garnishment doesn’t stop until you pay off your tax bill or you can prove undue hardship. However, even proving financial hardship doesn’t eliminate your tax bill. You pay it sooner or later.
How to Stop a Lien, Levy or Wage Garnishment
Although there are real differences between an IRS tax lien, levy, and wage garnishment, none of them are good news. When the IRS initiates these processes, it means that you don’t just owe taxes and penalties. You have also started to lose control in the process of paying your bill.
The best way to stop a lien, levy, or wage garnishment is to stop them before they start.
All three options are the government’s last resorts. First, filing these items is both time-consuming and expensive as all happen over several months. Second, the government would rather work on a regular, predictable payment plan.
As a result, you should respond to the letters you receive from the IRS either yourself or through a tax consultant. Contact us to learn more about how we can help release a lien, levy, or wage garnishment.
