Overview

When a taxpayer fails to pay assessed taxes, the IRS has a range of collection tools. Two of the most consequential are the federal tax lien and the levy. They are related but distinct: a lien is a legal claim that protects the government’s interest in your assets, while a levy is the mechanism the IRS uses to take those assets. Understanding how each works, your rights, and the practical steps you can take after receiving a notice will help you preserve options and limit financial harm.

How a federal tax lien works

  • When the IRS assesses a tax and sends a notice and demand for payment, a federal tax lien arises automatically if the taxpayer neglects or refuses to pay. The IRS files a Notice of Federal Tax Lien (NFTL) with local or state authorities to publicly alert creditors and purchasers that the United States claims an interest in the taxpayer’s property (IRS, “Understanding Your IRS Lien”).
  • The lien attaches to most property the taxpayer owns or later acquires—real estate, personal property, and financial assets—until the tax is paid or becomes unenforceable. Filing the NFTL protects the government’s priority over other creditors.
  • A lien can affect credit and a taxpayer’s ability to sell or refinance real estate because title companies and lenders will see the recorded lien during a title search.
  • The federal tax lien does not itself seize property or remove ownership; it creates a legal claim. The IRS must use a levy or another collection process to take property.

How an IRS levy works

  • A levy is the legal seizure of property to satisfy a tax debt. The IRS can levy wages (garnishment), bank accounts, business receivables, accounts receivable, and sometimes physical assets.
  • Before the IRS can levy most property, it must send a Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the actual levy (IRC § 6331; see IRS “Understanding Your IRS Levy”). That 30-day notice gives taxpayers an opportunity to respond or request a Collection Due Process (CDP) hearing.
  • A levy converts the government’s claim into collection: the IRS can garnish paychecks, withdraw funds from bank accounts, or direct third parties (employers, banks) to turn over property.
  • Some property is generally protected from levy. For example, certain public assistance benefits, some types of retirement plan protections, and items necessary for personal use may be exempt. The exact rules are technical and fact-dependent; consult IRS guidance or a tax professional.

Key differences at a glance

  • Purpose: A lien secures the government’s interest in property; a levy is the act of taking property to satisfy tax debt.
  • Visibility: An NFTL is a public record that can affect credit and title searches. A levy is typically noticed to the taxpayer and the third party holding assets.
  • Immediate impact: A lien interferes with borrowing, refinancing, or selling; a levy can remove funds or garnish wages immediately (after notice periods).
  • Resolution: A lien generally remains until the tax is paid, becomes unenforceable, or the IRS releases it; a levy ends when the collection is satisfied, or a release is issued.

Real-world examples

  • Example 1 (Lien): A homeowner owes $12,000 in unpaid income taxes. The IRS files an NFTL against the property. When the homeowner tries to refinance, the lender discovers the lien and requires it to be addressed before closing. The lien didn’t take the home, but it blocked the refinance until resolved.
  • Example 2 (Levy): A salaried worker ignored collection notices, and the IRS issued a levy on wages. After the 30-day notice period, the employer was instructed to withhold a portion of the worker’s paycheck and send it to the IRS. In many cases the employer will also provide a statement explaining wage garnishment and the amount exempt from collection.

Practical steps to avoid or respond to liens and levies

  1. Don’t ignore IRS notices
  • Notices escalate. Early action increases options: installment agreements, temporary delay for hardship, or offers in compromise (OIC). See IRS tools and timelines on notices and levies at the IRS site.
  1. Respond promptly and document communication
  • Keep copies of letters, dates, and the names of IRS representatives. If you call, request a reference number and follow up in writing.
  1. Request a Collection Due Process (CDP) hearing or Appeal
  • After the IRS issues a Notice of Intent to Levy, you have the right to request a CDP hearing within the 30-day notice window (Form 12153 is typically used to request appeals). A successful CDP can stop a levy and translate into alternative collection solutions if appropriate (IRS, “Your Rights When the IRS Seizes Your Property”).
  1. Negotiate a payment plan
  • The IRS commonly allows installment agreements for taxpayers who can pay over time. If you can propose and maintain a reasonable monthly payment, you may avoid a levy.
  1. Consider an Offer in Compromise (OIC) when eligible
  • An OIC may be a realistic path for taxpayers who cannot pay the full amount. The OIC process is document-heavy and uses either Form 656 or the IRS’s pre-qualifier tools. It’s worth comparing an OIC to installment agreements—many taxpayers are better off with an OIC only when collection potential and financial hardship make its acceptance likely. For help preparing an offer and understanding eligibility, see our guide: “What Is an Offer in Compromise? Eligibility, Process, and Alternatives.” (internal link)
  1. Ask for a levy release for financial hardship
  • If a levy would cause immediate economic hardship (lack of funds for basic living expenses), the IRS may release the levy temporarily. Provide a detailed financial statement and proof of hardship to the IRS or your representative.

Common pitfalls and misconceptions

  • Myth: “If I ignore the IRS, the problem will go away.” Reality: Collection actions escalate. Liens and levies remain until resolved; levies can freeze accounts and garnish wages.
  • Myth: “A lien is only a credit issue, not a legal problem.” Reality: A recorded federal tax lien is a legal encumbrance that must be cleared for many transactions.
  • Myth: “You can’t negotiate once a levy starts.” Reality: You can and should negotiate—installment agreements, offers in compromise, and hardship releases are available depending on your situation.

How liens and levies affect businesses

Small businesses are especially vulnerable. Payroll levies for unpaid payroll taxes can disrupt operations because the IRS can issue a Notice of Levy to collect payroll and deposit taxes. If a levied bank account belongs to an operating business, it can prevent payroll, supplier payments, and other essential functions. Business owners facing payroll tax issues should prioritize communication and consider penalty abatement or installment agreements for trust-fund recovery penalties where applicable.

When to involve a tax professional or attorney

If you receive an NFTL, a Notice of Intent to Levy, or find a levy already in place, consult a qualified CPA, enrolled agent, or tax attorney—especially when the amounts are large or business operations are affected. In my practice, early intervention often allows negotiation of an installment agreement or a temporary hold while a financial package is assembled for an OIC. Experienced practitioners also help prevent errors—such as failing to file for CDP on time—that can limit your options.

Useful internal resources

Authoritative sources and further reading

Professional disclaimer

This article is educational and intended to provide general information about IRS liens and levies. It does not constitute tax, legal, or financial advice for your particular situation. Tax law is fact-specific and changes over time; consult a licensed tax professional or attorney before making decisions or submitting forms to the IRS.

Bottom line

Liens and levies are powerful tools in the IRS’s collection toolbox. A lien places a claim that can block real estate and lending transactions; a levy takes property or funds to satisfy the debt. Acting quickly—by responding to notices, requesting hearings, negotiating payment plans, or pursuing an offer in compromise—gives you the best chance to protect assets and resolve tax debts on reasonable terms.