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Tax levy basics: what is it and what does it do?

It's been awhile since we've discussed the difference between a tax levy and a tax lien.

To be sure, the words themselves sound rather dry. But if it's a matter of having your wages seized or making it difficult to sell your house, being clear on what the terms mean is important.

In this post, then, we will explain what a tax levy does and how it differs from a tax lien.

A tax levy is the action that actually takes a taxpayer's property. A tax lien, by contrast, is the procedural step by which the government asserts an interest in a taxpayer's property in cases when there is unpaid tax debt.

Nearly a year ago, in our May 31 post, we discussed an example. In that post, we took note of a tax lien asserted by the IRS against a well-known singer who had substantial tax debt.

A levy, however, is the action that actually takes a taxpayer's property. The IRS could be after several different types of property. These can include:
• Wage garnishment
• Bank account
• Other property, such as a house or a car

If you didn't pay your taxes or put a plan in place to resolve them, the IRS can levy on any of these things. If the property is in your possession, the agency can seize it and sell it.

If the property is being held by someone else, such as a bank, the levy involves taking it from that third party. In addition to bank accounts, this can also happen with retirement accounts or even the cash value of life insurance.

Keep in mind, however, that there are formal procedures that the IRS must follow before levying on your property in this way. The IRS must, for starters, send you a Notice and Demand for Payment.

When you get such a notice, you may want to consider trying to work out a plan to resolve your tax debt with the IRS. For example, this could involve an offer in compromise (OIC). If the IRS accepts your offer, it would be a way for you to resolve your tax debt for less than the full amount you owe.

Source: IRS.gov, "Levy," Accessed May 28, 2014

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