How Tax Liens and Levies Work: Prevention and Removal Strategies

Overview

Tax liens and levies are two distinct but related collection tools used by the IRS and state tax authorities. A lien creates a legal claim against your property for unpaid taxes; a levy is the action that allows the government to actually take property or direct third parties (employers, banks) to hand over money. Left unaddressed, either can damage credit access, block property sales, or drain bank accounts.

This article explains how liens and levies typically arise, the taxpayer rights and deadlines to watch, practical prevention strategies, and step-by-step removal options. I draw on more than 15 years helping clients negotiate with the IRS; practical steps and timelines below reflect current IRS procedures as of 2025. For personalized guidance, consult a tax professional.

Sources: IRS Publication 594 (The IRS Collection Process) and the IRS Tax Lien Guide provide the official rules and forms referenced below (see links in Resources).

How liens and levies typically start

1. Assessment and notice. The IRS assesses tax liability after a return is processed or an audit. The agency then issues a Notice and Demand for payment. If the tax is not paid, the IRS may assess penalties and interest.

2. Notice to taxpayer. Before levying property, the IRS must send a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before taking levy action (IRC §6331(d)). That provides the taxpayer a chance to request a Collection Due Process (CDP) hearing using Form 12153.

3. Filing a Notice of Federal Tax Lien (NFTL). If the tax remains unpaid after required notices, the IRS may file an NFTL (public record) to alert creditors of the government’s claim. The NFTL does not seize property but can block or complicate real estate transactions and harm borrowing ability.

4. Levy. If the IRS proceeds, it may levy wages, bank accounts, accounts receivable, or seize property. Levies are enforced by collecting agents and can result in garnishment of wages or bank freezes.

Key deadlines and rights:

• CDP appeal: the taxpayer generally has 30 days from the date of the NFTL (or the notice of intent to levy) to request a CDP hearing (use Form 12153). [IRS Publication 594 explains CDP rights.]
• Levy notice: the IRS must give at least 30 days’ notice before a levy on wages or bank accounts.

Prevention: practical steps to avoid liens and levies

Preventing a lien or levy is far easier and less costly than removing one later. Common, effective actions include:

• File and pay on time. Filing returns (even if you cannot pay in full) avoids failure-to-file penalties and gives you legal standing to negotiate.
• Communicate early. Contact the IRS immediately if you cannot pay. Early contact preserves options such as Installment Agreements, which often stop levy actions if set up before enforcement begins. [In my practice, early outreach reduced levies for many clients by enabling short-term installment terms while they arranged funds.]
• Request an installment agreement. The IRS offers online and streamlined installment agreements for eligible balances. If accepted and you stay current, the IRS typically will not levy.
• Consider Offer in Compromise (OIC). If you cannot pay the full amount, an OIC may settle the debt for less than the balance if you meet strict criteria and can show inability to pay.
• Put accounts on hold for hardship. If you are financially unable to pay basic living expenses, request Currently Not Collectible (CNC) status; it suspends aggressive collection while the status holds.
• Use payroll and withholding planning. For small businesses, pay payroll taxes timely; payroll tax liens and levies escalate quickly and have criminal exposure in extreme cases.

Practical tip: keep careful records of notices (dates, CP/letter numbers). Most IRS actions reference a specific notice code (e.g., CP504, CP90). That code drives the timeline for appeals and hearings.

Removal and mitigation options (step-by-step)

If a lien or levy exists, these are the principal remedies and how they work:

1. Pay the tax in full

• Payment in full is the fastest way to remove a lien or stop a levy. After full payment, the IRS typically files a certificate of release (Form 668(Y)) or withdraws public filings. A recorded Notice of Federal Tax Lien should be released promptly once the liability is satisfied.

1. Enter an Installment Agreement

• A compliant installment plan can stop levy actions if you apply before the levy is executed or if the plan meets IRS rules. File online or work with a practitioner to propose payments. Keep current—defaulting may restart collection actions.

1. Offer in Compromise (OIC)

• If you qualify, an OIC can settle the liability for less than the full amount. OICs are subject to rigorous financial review and require full disclosure of assets and income.

1. Currently Not Collectible (CNC)

• If paying would create a severe financial hardship, CNC status temporarily halts collection. Interest and penalties continue to accrue, but levies usually stop while CNC is in effect.

1. File for Collection Due Process (CDP) appeal

• Timely file Form 12153 to request a CDP hearing if you receive a Notice of Federal Tax Lien or a Final Notice of Intent to Levy. A CDP hearing can delay collections and, in some cases, result in an appealable decision to the U.S. Tax Court.

1. Request lien withdrawal or subordination

• Withdrawal (Form 12277) removes the public Notice of Federal Tax Lien when the IRS determines withdrawal is appropriate (for example, where withdrawal will facilitate collection through a collateral sale). Withdrawal doesn’t mean the tax owed disappears — it simply removes the public filing.
• Subordination gives a mortgage lender priority over the IRS lien when selling or refinancing, helping you access financing even when a lien exists.

1. Release/Discharge of lien on specific property

• You can request discharge of specific property from the lien so the property can be sold free of the federal lien. This requires IRS approval and application.

1. Ask for levy release on hardship grounds

• The IRS may release an existing levy if it causes an economic hardship (cant meet reasonable living expenses) or if it collects more than the liability. Submit a Levy Release Request explaining hardship and provide financial documentation.

1. Bankruptcy considerations

• Some federal tax debts may be dischargeable in bankruptcy; however, federal tax liens generally survive bankruptcy and may attach to assets unless properly addressed. Coordinate with a bankruptcy attorney and tax professional.

Documentation and proof you’ll need

• Notice letters (CP numbers), account transcripts, collection notices.
• Recent pay stubs, bank statements, and a complete list of monthly living expenses (for CNC or hardship requests).
• If filing an OIC or requesting withdrawal, provide proof of assets and valuation documentation.

Common misconceptions

• A lien is not the same as seizure. A lien is a claim; a levy seizes property. Both can occur, but not always together.
• Paying partially does not automatically remove a lien. Only full payment or an approved settlement/release will remove the federal claim from recorded public records unless the IRS agrees to withdraw.
• Filing bankruptcy always removes a lien. Bankruptcy may affect the underlying dischargeability of tax debt, but recorded federal liens can survive bankruptcy unless specifically addressed.

Real-world examples (anonymized)

• Case 1: Clerical error turned lien — In one file I handled, a taxpayer received a Notice of Federal Tax Lien after the IRS didn’t match a payment to the correct account. A careful review and proof of payment led to withdrawal of the lien and correction of the taxpayer’s account.
• Case 2: Business payroll tax levy — A small business faced bank levies for unpaid payroll taxes. We negotiated a short-term installment agreement and requested a partial release to meet payroll obligations while repaying the liability; the business avoided closure.

These examples show the value of early engagement and accurate documentation.

Next steps — practical checklist

1. Don’t ignore IRS notices — read and calendar deadlines. 2. Obtain account transcripts at IRS.gov to confirm assessment dates and amounts. 3. If you got a Final Notice of Intent to Levy or a Notice of Federal Tax Lien, file Form 12153 for a CDP hearing within 30 days. 4. Gather bank statements, paystubs, and living-expense documentation. 5. Contact a CPA, enrolled agent, or tax attorney if the amount, liens, or levies are substantial.

Internal resources from FinHelp that may help:

• For instructions on getting a lien released after payment, see “How to Get a Tax Lien Released After Full Payment.” (https://finhelp.io/glossary/how-to-get-a-tax-lien-released-after-full-payment/)
• For differences between federal and state actions, see “Federal Tax Liens vs State Tax Liens: What You Need to Know.” (https://finhelp.io/glossary/federal-tax-liens-vs-state-tax-liens-what-you-need-to-know/)
• For withdrawal-specific guidance, see “Withdrawal of federal tax lien.” (https://finhelp.io/glossary/withdrawal-of-federal-tax-lien/)

Resources and authoritative references

• IRS Publication 594, The IRS Collection Process: https://www.irs.gov/pub/irs-pdf/p594.pdf
• IRS Tax Lien Guide (small business/self-employed): https://www.irs.gov/businesses/small-businesses-self-employed/tax-lien-guide
• Form 12153 (Request for a Collection Due Process or Equivalent Hearing): https://www.irs.gov/forms-pubs/about-form-12153
• Form 12277 (Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien): https://www.irs.gov/forms-pubs/about-form-12277

Professional disclaimer
This article is educational and does not replace personalized tax advice. Tax rules and IRS procedures change; for decisions about liens, levies, offers in compromise, or bankruptcy, consult a qualified tax professional, enrolled agent, CPA, or tax attorney.

If you’d like, provide the notice code and the dates you received IRS letters, and a tax professional can use that to determine exact appeal windows and next steps.