While many people are familiar with the terms "tax lien" and "tax levy," there is often some confusion regarding what is involved with each of these actions. In fact, both approaches are components in an overall process used by tax agencies to collect back taxes that are owed by individuals or companies. Typically, the tax lien is the first step in the overall collection process, with the levy following if circumstances require that the process be escalated.
With a tax lien, the local or national tax agency is essentially laying claim to the assets of the taxpayer by filing a formal claim in the public records of the county or parish in which the taxpayer resides. This movement alerts any potential buyers of those assets that in the event a sale is made, all or a portion of that amount must be paid directly to the tax agency as the means of settling the debt. For example, if the taxpayer owns a home and has $30,000 US dollars in equity in that property, all or a portion of that equity would have to be surrendered to settle an outstanding tax claim when the owner chooses to sell the home.
Typically, a lien will stay in place until the tax debt is paid in full. Once the debt is retired, the tax agency removes the lien and the owner is free to sell those assets at will. The agency will use the processes provided by the local court system to remove the lien once the debt is verified as paid in full, normally within 30 to 60 calendar days of receiving the final payment on the back taxes.
By contrast, a tax levy may be necessary if the taxpayer does not make some sort of payment arrangements with the agency. In this scenario, the tax agency goes through the court system to lay claim to different assets held by the taxpayer and seize those assets in order to settle the outstanding debt. For example, the agency may seize the balances of bank accounts and apply those balances to the debt owed as part of the tax levy. In like manner, the agency may obtain permission to garnish the wages and salary of the taxpayer, ordering the employer to withhold a specific amount from the employee’s paycheck each pay period, until the debt is retired in full.
Many tax agencies are willing to work with taxpayers who acknowledge the debt and wish to make payment arrangements that are agreeable to both parties. Choosing to continually ignore requests from the agency to make payment arrangements will often result in a tax levy that strips the taxpayer of money or property, or even leads to the embarrassment of wage garnishment. For this reason, individuals who do owe back taxes would do well to work with the appropriate tax agencies to resolve the debt, ensuring that the issue never escalates past a tax lien.