Tax Liens & Levies FAQ

A federal tax lien is a legal claim against all your property and rights to property, arising automatically under IRC Section 6321 when you fail to pay tax after the IRS makes demand for payment. The lien arises by operation of law from the moment the IRS assesses the tax and sends a Notice and Demand for Payment, even before the IRS files any public notice. This automatic "secret lien" attaches to all property you currently own and all property you acquire while the lien remains in effect, including real estate, vehicles, bank accounts, investment accounts, business assets, accounts receivable, and even intangible rights like intellectual property.

To protect its priority against other creditors, the IRS files a Notice of Federal Tax Lien (NFTL) in public records under IRC Section 6323. This public filing—typically recorded with the county recorder in counties where you own property or reside—gives notice to the world of the government's claim. Under Internal Revenue Manual (IRM) 5.12.2, the IRS typically files NFTLs when unpaid tax liability exceeds $10,000, though this is internal policy rather than legal requirement, and the IRS has discretion to file for smaller amounts or refrain from filing for larger amounts when appropriate.

Once filed, the NFTL becomes part of public records, appearing in lien searches conducted by title companies, lenders, and credit agencies. While tax liens no longer appear on consumer credit reports as of April 2018 (due to changes in credit reporting agency policies), they remain in public records accessible to anyone conducting due diligence. The lien severely impacts your ability to sell property, refinance loans, or obtain credit, as most lenders won't close transactions without lien satisfaction or subordination. The lien remains in effect until the tax is fully paid, the IRS releases it under IRC Section 6325, or the 10-year collection statute under IRC Section 6502 expires. Even after the statute expires, the IRS doesn't automatically release the lien—you must request release under Section 6325(a)(1).

An IRS levy under IRC Section 6331 is the legal seizure of your property or property rights to satisfy tax debt. Unlike a lien, which is a claim against property, a levy is the actual taking of property. The IRS has extraordinarily broad levy powers, exceeding those of most creditors, and can seize property administratively without obtaining a court judgment. Levy authority extends to virtually all property and rights to property, including wages and salary, bank accounts, social security benefits (up to 15%), retirement accounts including 401(k)s and IRAs, investment accounts, vehicles, real estate, business assets and inventory, accounts receivable, life insurance cash values, rental income, and commissions.

Before levying, the IRS must satisfy specific notice requirements under IRC Section 6330. The agency must provide a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (Letter 1058 or LT11) at least 30 days before levy action. This notice gives you the right to request a Collection Due Process (CDP) hearing before an independent Appeals Office to challenge the levy or proposed collection action. The hearing request must be filed on Form 12153 within 30 days of the Final Notice date. During the CDP hearing, you can raise collection alternatives, installment agreements, offers in compromise, and challenges to the underlying liability if you had no prior opportunity to dispute it.

Wage levies are continuous, taking a portion of each paycheck until the levy is released or the debt is satisfied. The amount exempt from wage levy is minimal—calculated using Publication 1494 based on filing status and dependents, typically leaving only $1,000-$1,500 monthly for a single person. Bank levies freeze your account and seize the balance after 21 days. Property levies involve IRS seizure and sale at auction, often for substantially less than fair market value. Certain property is exempt from levy under IRC Section 6334, including unemployment benefits, certain disability payments, workers' compensation, minimum weekly wages (approximately first $1,000 of monthly income), school books and clothing, undelivered mail, and specified amounts of household goods and tools of trade. However, these exemptions are limited, and most property remains subject to levy.

Under IRC Section 6325(a), the IRS must release a federal tax lien within 30 days after: the tax liability is fully satisfied (paid in full); the liability becomes legally unenforceable (for example, the collection statute expired); the IRS accepts a bond in an amount sufficient to satisfy the liability plus interest for the bond period; or other circumstances specified in the statute occur. Lien release doesn't erase the lien's prior existence or remove it from historical public records, but it eliminates the lien's ongoing effect and serves as official notice that the government no longer claims an interest in your property.

Even after the IRS releases a lien, the Notice of Federal Tax Lien remains in public records as a historical filing. To completely remove the public notice as if it had never been filed, you must request lien withdrawal under IRC Section 6323(j)(1), added by the Fresh Start Initiative. Lien withdrawal is available when: entering into a direct debit installment agreement for tax liabilities not exceeding $25,000; withdrawal will facilitate tax collection (for example, by allowing you to maintain employment requiring security clearance); or withdrawal would be in the best interest of both the taxpayer and the government, considering the taxpayer's compliance history and circumstances. Withdrawal removes the NFTL from public records, which can significantly improve your credit and borrowing ability.

Lien subordination under IRC Section 6325(d) doesn't release the lien but allows another creditor to move ahead of the IRS's priority for a specific transaction. Subordination is useful for refinancing mortgages, obtaining business loans, or selling property where proceeds will be used to pay down the tax debt. The IRS grants subordination when it facilitates tax collection, such as by allowing a refinance that generates cash to pay the IRS. Lien discharge under IRC Section 6325(b) removes the lien from specific property, such as when selling real estate and using proceeds to partially satisfy the tax debt. Each of these mechanisms requires submitting specific forms (Form 14135 for withdrawal, Form 14134 for subordination, Form 14135 for discharge) with detailed justification and supporting documentation.

Several defenses and procedural protections exist against IRS levies. First, you have the right to a Collection Due Process (CDP) hearing under IRC Section 6330 if you timely request it within 30 days of receiving the Final Notice of Intent to Levy. During the CDP hearing, you can raise various issues: challenges to the underlying tax liability if you had no prior opportunity to dispute it; spousal defenses under IRC Section 6015; collection alternatives including installment agreements, offers in compromise, or currently not collectible status; and arguments that the proposed levy action is inappropriate given your circumstances. The levy action is suspended during the CDP hearing process and any subsequent judicial review.

Economic hardship provides another defense under IRC Section 6343(a)(1)(D). The IRS must release a levy if it determines that the action is creating an economic hardship, meaning you cannot pay basic living expenses. To assert hardship, complete Form 433-A or 433-F (Collection Information Statement) documenting your income and necessary expenses. If monthly expenses equal or exceed income based on the IRS's Collection Financial Standards, the IRS should release the levy and may place your account in currently not collectible status. The hardship determination considers your individual circumstances, health issues, age, and other relevant factors.

Procedural defenses include: improper notice (the IRS failed to provide required notices or provide them at your last known address); levy on exempt property under IRC Section 6334; levy while an installment agreement or offer in compromise is pending, in violation of IRC Section 6331(k); levy during the period for requesting a CDP hearing; or levy prohibited during innocent spouse relief proceedings under IRC Section 6015. You can also request levy release under IRC Section 6343(a) when the levy will facilitate collection of the tax (such as by allowing you to continue working), the liability is satisfied or becomes unenforceable, or release would be in the government's best interest. If the IRS wrongfully levies, you may have damages claims under IRC Section 7426 (wrongful levy) or IRC Section 7433 (damages for certain unauthorized collection actions).

California state tax liens operate similarly to federal tax liens but under California law. Under Revenue and Taxation Code Section 18817, when you fail to pay state tax after notice and demand, the Franchise Tax Board (FTB) may file a Certificate of Tax Lien with the Secretary of State. This filing creates a lien on all real and personal property in California that you own or later acquire. Unlike federal liens filed with county recorders, California state tax liens are filed centrally with the Secretary of State and recorded in the Uniform Commercial Code (UCC) filing system, making them searchable statewide.

The California tax lien attaches to all property located in California and to certain property located outside California if you're a California resident. The lien's priority is generally determined by the filing date, competing with other creditors based on when their interests were perfected. Under Revenue and Taxation Code Section 18818, the FTB lien has priority over subsequent creditors and purchasers but not over previously perfected security interests. Certain superpriority interests—such as purchase money security interests perfected within 20 days and mechanics' liens for work completed before the tax lien filing—may take priority over the state tax lien.

California tax liens remain in effect for 10 years from the assessment date but can be extended by filing a new certificate before expiration. The FTB typically files liens for unpaid tax exceeding $500, though this is administrative policy rather than legal requirement. The lien appears in property title searches and UCC searches, affecting your ability to sell property, obtain loans, or conduct business. Unlike federal liens, which no longer appear on credit reports, California tax liens may still impact credit if reported by public record services. To release a California tax lien, you must pay the tax in full, enter into a bond or other arrangement acceptable to the FTB, or obtain subordination or withdrawal under limited circumstances similar to federal lien relief provisions.

Yes, but the IRS can seize a primary residence only under limited circumstances with substantial procedural protections. Under IRC Section 6334(a)(13)(B), a principal residence is not exempt from levy like certain other property, but IRC Section 6334(e) imposes strict requirements before the IRS can seize it. First, a federal district court must approve the seizure in a proceeding where the court determines that the IRS has exhausted all reasonable collection alternatives and that the proposed seizure is reasonable under the circumstances. This judicial approval requirement provides significant protection not applicable to most other property seizures.

Additionally, IRC Section 6334(e)(1)(B) requires written approval by the IRS Commissioner or delegate, meaning high-level IRS officials must personally authorize residential seizures. This approval requirement ensures supervisory review before such drastic action. As a practical matter, the IRS very rarely seizes primary residences due to these procedural hurdles, the adverse publicity such seizures generate, and the availability of alternative collection methods. The IRS typically pursues residential seizure only in egregious cases involving substantial tax debt, taxpayer recalcitrance, and exhausted collection alternatives.

Even when these requirements are met, homeowners have defenses. You can challenge the seizure in the judicial proceeding by demonstrating that reasonable collection alternatives exist (installment agreements, offers in compromise, currently not collectible status), that the proposed seizure is unreasonable given your circumstances (small equity in the home, need for shelter, economic hardship), or that procedural requirements weren't satisfied. State homestead exemptions don't apply to federal tax levies, but they may affect the amount of equity available to satisfy the debt after sale. If the IRS does seize a residence, it must conduct a public sale and apply the proceeds to the tax debt, with any excess returned to you. However, forced sales typically generate proceeds well below market value due to the lack of financing availability and the property's encumbered status.

Tax liens and levies are distinct collection mechanisms with different legal effects, though both arise from unpaid tax liabilities. A tax lien under IRC Section 6321 is a legal claim or encumbrance against your property, similar to a mortgage. The lien arises automatically when you fail to pay tax after demand and attaches to all your property and rights to property. It doesn't transfer ownership but creates a security interest that must be satisfied before you can sell property with clear title. The lien follows the property, so even if you transfer property while a lien exists, the government's claim continues against that property in the transferee's hands (subject to certain exceptions for bona fide purchasers under IRC Section 6323).

A levy under IRC Section 6331, by contrast, is the actual seizure or taking of property to satisfy the tax debt. While a lien is passive (creating a claim without taking possession), a levy is active (taking actual possession or control of property). The levy transfers ownership of the property to the government, which then sells it and applies the proceeds to the tax debt. Levies can be one-time seizures (bank account levies, seizure of vehicles or real estate) or continuous (wage levies that continue until released). Unlike liens that arise automatically, levies require affirmative IRS action and must be preceded by specific notices under IRC Section 6330.

Procedurally, liens and levies have different requirements and consequences. Liens can exist for the entire 10-year collection statute without the IRS taking further action, simply preventing clear title transfers. The IRS files Notice of Federal Tax Lien in public records to perfect its priority but doesn't need to file the notice for the lien to exist. Levies, however, require the IRS to serve levy notices on third parties (employers, banks) or take physical possession of property. The IRS must provide a Final Notice of Intent to Levy at least 30 days before levy action, giving you Collection Due Process hearing rights. Strategically, you might propose alternatives to prevent levy action (installment agreements, offers in compromise) while accepting the lien's existence as unavoidable until the debt is resolved.

Lien subordination and discharge are mechanisms to facilitate specific transactions while the tax lien remains in effect for other property. Subordination under IRC Section 6325(d) allows another creditor's interest to move ahead of the IRS's lien priority for a specific transaction without releasing the lien. This is particularly useful for refinancing mortgages where the new lender requires first-priority position. The IRS grants subordination when: the amount received from the subordinating transaction will ultimately be paid to the IRS; subordination will facilitate tax collection; or the value of the IRS's interest won't be harmed by the subordination (sufficient equity exists to protect both the new creditor and the IRS).

Common subordination situations include refinancing real estate to lower interest rates and generate cash to pay the IRS, obtaining business loans secured by assets also subject to the tax lien, and restructuring debt to improve cash flow and tax payment ability. To request subordination, file Form 14134 (Application for Certificate of Subordination of Federal Tax Lien) with detailed information about the proposed transaction, documentation of property value (appraisals), loan terms, and explanation of how subordination will facilitate tax collection. The IRS charges a user fee for processing subordination requests ($610 as of 2024). Processing typically takes 30-60 days, so subordination requests should be submitted well before closing deadlines.

Lien discharge under IRC Section 6325(b) removes the lien from specific property while keeping it in effect against other property. Discharge is granted when: property subject to the lien is sold and the proceeds are held as a fund subject to the lien (such as in escrow accounts); the IRS determines that its interest in the property being discharged has no value (property has no equity above senior liens); the IRS receives payment equal to its interest in the property (based on a fraction of the sales proceeds proportionate to the IRS's interest); or the IRS determines that discharge will facilitate tax collection. Discharge is commonly used in real estate sales where proceeds are insufficient to pay the full tax debt. The IRS receives its proportionate share of the proceeds, and the property is released from the lien, allowing clear title transfer. To request discharge, file Form 14135 with documentation of the property value, encumbrances, and proposed distribution of proceeds.

Tax liens survive bankruptcy in most cases, though bankruptcy can discharge the underlying personal liability for the tax debt in qualifying situations. Under 11 USC Section 523(a)(1), most tax debts are nondischargeable in bankruptcy, but important exceptions exist for older income tax debts meeting specific criteria: the tax year was due at least three years before bankruptcy filing; you filed the return at least two years before filing; the IRS assessed the tax at least 240 days before filing (or the assessment period was suspended during offers in compromise or prior bankruptcies); the return was not fraudulent; and you didn't willfully attempt to evade or defeat the tax. When these conditions are met, bankruptcy can discharge the personal liability for the tax debt.

However, even when personal liability is discharged, tax liens that attached to property before bankruptcy filing survive under 11 USC Section 506(d) and the Supreme Court's decision in Dewsnup v. Timm, 502 U.S. 410 (1992). This means that while you're no longer personally liable for the discharged tax (the IRS can't levy wages or bank accounts after bankruptcy), the lien continues to encumber property you owned when bankruptcy was filed. The IRS can't pursue new collection actions against you personally or property acquired after bankruptcy, but it can enforce the pre-bankruptcy lien against pre-bankruptcy property, preventing you from selling or refinancing that property without satisfying the lien.

The interplay between discharge and lien survival creates complex planning considerations. Chapter 7 bankruptcy can eliminate personal liability for qualifying tax debts but leaves liens in place against existing property. Chapter 13 bankruptcy allows you to pay dischargeable tax debts through a payment plan (typically 3-5 years) as general unsecured claims, potentially at pennies on the dollar if you lack property equity. Tax debts secured by liens must be paid in full through the Chapter 13 plan to eliminate the lien. The bankruptcy automatic stay under 11 USC Section 362 stops all collection actions during the bankruptcy case, including levy actions and (in most cases) new lien filings. Strategic bankruptcy timing can preserve discharge eligibility while minimizing lien attachment to property. These complex interactions require careful analysis with both tax and bankruptcy counsel before filing.

Yes, both the IRS and California FTB can levy certain retirement accounts to collect unpaid taxes, though some retirement accounts have protection from levy. Under federal law, IRC Section 6331 allows the IRS to levy retirement accounts including traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, and pension plans. IRC Section 6334(a) lists property exempt from levy but does not include most retirement accounts. However, the IRS has adopted administrative policy exempting certain pension and retirement benefits under IRC Section 6334(a)(12) for "certain service-connected disability payments" and limited other retirement income.

ERISA-qualified retirement plans receive some practical protection because the levy must be served on the plan administrator, and many plans have anti-alienation provisions under ERISA Section 206(d)(1) that prohibit assignments and garnishments. These provisions may prevent or complicate levy execution, though they don't absolutely bar IRS levies for federal tax debts. The Supreme Court held in Patterson v. Shumate, 504 U.S. 753 (1992), that ERISA's anti-alienation provisions protect qualified plans from general creditor claims in bankruptcy, but this protection doesn't necessarily apply to government tax levies, which have special priority status.

California law under Revenue and Taxation Code Section 18808 provides that FTB levies are subject to the same exemptions as general creditor garnishments under California Code of Civil Procedure Section 704.115. This section exempts certain retirement benefits from levy, including: public employee retirement system benefits; private retirement plan benefits to the extent reasonably necessary for support of the judgment debtor and spouse/dependents; IRAs to the extent necessary for support; and certain annuity contract payments. The "reasonably necessary for support" standard requires factual analysis of the taxpayer's income and expenses. Unlike the broad exemptions from general creditor claims, tax levies receive more liberal collection authority, and the FTB may successfully levy retirement accounts when you have other sources of income or the accounts contain substantial balances exceeding amounts necessary for support. If facing retirement account levies, you should assert exemptions in writing with financial documentation showing the retirement income is necessary for your support.

The Collection Due Process (CDP) hearing under IRC Section 6330 provides a critical opportunity to challenge IRS collection actions before they occur. You become eligible for a CDP hearing when the IRS sends you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (typically Letter 1058 or LT11) or files a Notice of Federal Tax Lien and sends you Notice of Filing (Letter 3172 or CP504). These notices include information about your CDP hearing rights and a Form 12153 (Request for a Collection Due Process or Equivalent Hearing) that you use to request the hearing.

To request a CDP hearing, you must file Form 12153 within 30 days from the date of the CDP notice. This deadline is strictly enforced—the IRS date-stamps the notice, and late requests result in loss of CDP hearing rights, though you may qualify for an "equivalent hearing" with fewer protections. The form should be filed with the address specified on the notice, typically an IRS office in your area. In the form, you should: check the box indicating which notice you received; specify which tax years and types of tax you're disputing; describe the issues you want to discuss at the hearing; and propose collection alternatives you want considered.

During the CDP hearing, you can raise several categories of issues: challenges to the underlying tax liability if you had no prior opportunity to dispute it (for example, you never received a Notice of Deficiency and didn't otherwise challenge the assessment); spousal defenses under IRC Section 6015; collection alternatives including installment agreements, offers in compromise, currently not collectible status, or adjustment of the tax; challenges to the appropriateness of the collection action based on your financial circumstances; and verification that the IRS followed applicable laws and administrative procedures. The Appeals Office conducts the hearing independently from the collection function. The hearing can be in-person, by telephone, or by correspondence based on your preference. After the hearing, Appeals issues a Notice of Determination that you can appeal to United States Tax Court within 30 days under IRC Section 6330(d). Importantly, filing a timely CDP hearing request suspends levy action (though not lien filing) during the hearing process and any Tax Court review, providing crucial breathing room to resolve the matter.

Nominee lien theory allows the IRS to pursue property held in the name of third parties when the government can prove that the taxpayer is the true beneficial owner and the third party holds title merely as a nominee or alter ego. Under federal tax lien law as interpreted by courts, the IRS's lien attaches to all property and rights to property belonging to the taxpayer under IRC Section 6321, regardless of whose name appears on title. When taxpayers transfer property to family members, business entities, or other third parties to shield assets from tax collection, the IRS can file suit under 28 USC Section 2410 to enforce its lien against the nominee-held property.

Courts apply multi-factor tests to determine nominee status, considering: whether consideration was paid for the transfer; whether the taxpayer retained possession, use, and enjoyment of the property after transfer; whether the property continued to be used for the taxpayer's benefit; whether the transferee had knowledge of the tax liability when acquiring the property; whether the transfer occurred after IRS collection efforts began; whether there was a close family or business relationship between taxpayer and transferee; and whether the transfer rendered the taxpayer insolvent or with insufficient assets to pay the tax debt. No single factor is determinative—courts examine the totality of circumstances to determine whether the transfer was legitimate or a sham designed to defraud creditors.

Common nominee situations include transfers of real estate or vehicles to spouses or children while the taxpayer continues using the property, business assets transferred to new entities controlled by the taxpayer, and bank accounts in others' names funded with the taxpayer's money. The IRS pursues nominee liens through federal district court actions, often seeking not only to enforce the lien but also to void fraudulent transfers under state fraudulent conveyance law. Defenses to nominee lien enforcement include demonstrating that the transferee paid adequate consideration, that the transfer occurred before the tax liability arose, that the transferee independently controls and benefits from the property, and that the transfer was legitimate rather than a sham. California law under Civil Code Section 3439 et seq. (Uniform Voidable Transactions Act) similarly allows creditors, including the FTB, to void transfers made to defraud creditors, providing parallel state law remedies for pursuing nominee property. Given the serious consequences—including potential fraud penalties and criminal prosecution for egregious asset concealment—taxpayers should never transfer property to nominees to avoid tax collection, and third parties should carefully scrutinize whether they're receiving property that could subject them to nominee liability.