Taxes can be complicated, especially when dealing with terms like tax levy and tax lien. Both are connected to unpaid taxes, but they serve different purposes and have distinct impacts on your finances. Understanding these differences can help you make informed decisions if you find yourself facing either situation.
What is a tax lien?
A tax lien is a legal claim that the government places on your property when you fail to pay your taxes. This lien indicates that you owe money and allows the government to secure its interest in your property. The lien can apply to real estate, personal property, and financial assets. A tax lien does not mean the government will immediately seize your property; instead, it serves as a notice that the government has a legal right to your assets until you settle the debt. A tax lien can also damage your credit score, making it more challenging to obtain loans or credit in the future.
What is a tax levy?
A tax levy is more severe than a tax lien. It is the process in which the government actually takes your property to cover unpaid taxes. This may involve garnishing your wages, withdrawing money from your bank account, or seizing and selling your property. A tax levy occurs when you fail to pay your taxes after receiving multiple notices from the IRS. Unlike a tax lien, which only places a claim on your property, a tax levy results in direct action to collect the money owed.
Understanding the differences between a tax lien and a tax levy can help you assess your options and take appropriate action if you face either scenario. Addressing unpaid taxes as soon as possible is the best way to avoid these serious consequences and protect your financial stability.