What Is a Tax Lien and a Tax Levy?

April 15 Circled on Calendar for Tax DateWith limited exceptions, most Americans are required to file tax returns with the Internal Revenue Service, and if you work or live in North Carolina, the North Carolina Department of Revenue.  If you do not file and pay your taxes on time each year, you will incur penalties and interest on the amount of money you owe the tax entity.  Initially, the tax entity will likely work with you to establish a payment plan for the taxes you owe.  However, if you make no effort to contact and work with the taxing entity, do not be surprised if a lien is placed against all of the property you own or your wages are garnished through a tax levy.

First, let’s discuss the difference between a tax lien and a tax levy.

A tax lien is a security interest against your property.  The IRS records a tax lien with the clerk of court in the county where you live.  The lien is on all real and personal property you own including your house, car, bank accounts, clothing, household goods, etc.  As a result, you will be unable to sell your home, car or other possessions without first obtaining a release from the IRS.  In other words, the IRS will now allow you to sell your house and make a profit without being paid at least a portion of the debt that is owed to them.

A tax levy is a legal seizure of your property to satisfy a tax debt.  With a tax levy, the IRS can seize and sell your house, car or other assets.  They can also seize your bank accounts, retirement accounts, state tax refunds and other assets.  They can also garnish wages.

By filing bankruptcy, you may be able to eliminate some of the tax debt and stop a wage garnishment while in an active bankruptcy.  If you file a Chapter 7 bankruptcy to eliminate credit card, medical bill and other consumer debt, the wage garnishment will stop while you are in the bankruptcy but may resume once the bankruptcy is complete and if taxes are still owed.  In certain situations, amounts owed on taxes that were due more than three year ago may be eliminated in a Chapter 7 bankruptcy.  Unfortunately, if a tax lien is placed for the older tax years the tax debt may be eliminated BUT the lien is still in effect.  As a result, you may still be required to pay the taxes if you sell your house or car in the future.  As a result, you should contact the IRS and State of North Carolina and request a copy of any tax liens prior to filing bankruptcy.

You may want to consider a Chapter 13 bankruptcy to restructure your tax debt and pay the taxes over the course of three to five years.  If you decide to file bankruptcy to restructure your tax debt, it is very important you determine whether there is a tax lien before the bankruptcy is filed.  The existence of liens will impact the amount owed in the bankruptcy and will directly impact the monthly payments in a Chapter 13 repayment plan.

Tax liens and tax levies are the IRS’ and State’s way of ensuring taxes are paid by the majority of their citizens.  If taxes are owed, it is best to work with the IRS and state proactively to avoid tax liens and levies.  However, should you find yourself with a lien or levy, you may want to consider bankruptcy to restructure the payments.