When tax debts go unpaid, the IRS has collection tools that are more powerful than those available to virtually any private creditor. Two of the most significant—the federal tax lien and the levy—are often confused, but they serve different purposes and have different implications for business owners. Understanding the distinction, and knowing your rights in the collection process, is essential for any taxpayer facing unpaid tax obligations.
Federal Tax Liens
A federal tax lien arises automatically when the IRS assesses a tax liability, sends the taxpayer a notice and demand for payment, and the taxpayer fails to pay within 10 days. The lien attaches to all of the taxpayer's property and rights to property—including real estate, personal property, financial accounts, and accounts receivable—and continues until the tax liability is satisfied or becomes unenforceable by reason of lapse of time (generally 10 years from the date of assessment).[1]
The lien is a security interest—it does not seize property, but it encumbers it. A taxpayer with a federal tax lien can still sell property, but the lien must be satisfied from the proceeds. The IRS may also file a Notice of Federal Tax Lien in the county records, which puts third parties (lenders, buyers, credit agencies) on notice of the government's claim. A filed lien can devastate a business's credit rating and its ability to obtain financing.
Lien Subordination, Discharge, and Withdrawal
The IRS has authority to subordinate, discharge, or withdraw a tax lien in appropriate circumstances. Subordination allows another creditor (such as a bank providing a line of credit) to take priority over the IRS's lien, which may be necessary for the taxpayer to obtain financing to pay the tax debt. Discharge removes the lien from a specific piece of property, typically when the property is being sold and the IRS will receive proceeds. Withdrawal removes the public notice of the lien, which can restore the taxpayer's credit rating while the underlying lien remains in effect.[2]
IRS Levies
A levy is the actual seizure of property to satisfy a tax debt. Unlike a lien, which is a passive claim, a levy is an active enforcement action. The IRS can levy bank accounts, wages, accounts receivable, Social Security benefits, and other sources of income and assets. In extreme cases, the IRS can seize and sell real estate, vehicles, and other tangible property.[3]
Before issuing a levy, the IRS must generally provide the taxpayer with a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy action. This notice triggers the taxpayer's right to a Collection Due Process (CDP) hearing before the IRS Independent Office of Appeals.
Collection Due Process Hearings
The Collection Due Process hearing is a critical safeguard. At the CDP hearing, the taxpayer can challenge the underlying tax liability (if the taxpayer has not had a prior opportunity to dispute it), propose alternative collection methods such as an installment agreement or offer in compromise, and argue that the levy action is inappropriate under the circumstances. The CDP hearing is conducted by an Appeals officer who is independent from the collection division.[4]
The request for a CDP hearing must be filed within 30 days of the date of the Final Notice. If the request is timely, the IRS cannot proceed with the levy until the hearing is completed and any resulting Tax Court petition is resolved. If the 30-day deadline is missed, the taxpayer may still request an "equivalent hearing," but the levy is not stayed pending the equivalent hearing.
Resolution Options
Installment Agreements
An installment agreement allows the taxpayer to pay the tax debt in monthly installments over time. For debts of $50,000 or less, streamlined installment agreements are available with minimal financial disclosure. For larger debts, the IRS will require detailed financial information to determine the taxpayer's ability to pay.
Offers in Compromise
An offer in compromise (OIC) allows the taxpayer to settle the tax debt for less than the full amount owed. The IRS evaluates OICs based on the taxpayer's ability to pay, income, expenses, and asset equity. The OIC program is more accessible than many taxpayers realize, but the application process is detailed and the IRS's acceptance rate is historically around 30 to 40 percent.
Currently Not Collectible Status
If the taxpayer's financial situation is such that paying the tax debt would create economic hardship, the IRS may place the account in "currently not collectible" (CNC) status. While in CNC status, the IRS suspends active collection efforts, though interest and penalties continue to accrue and the federal tax lien remains in place. CNC status is not permanent—the IRS periodically reviews the taxpayer's financial condition and may resume collection if the taxpayer's circumstances improve.[5]
Business owners facing IRS collection actions should consult with a tax controversy attorney as early as possible. The earlier the engagement, the more options are available and the better the outcome is likely to be.