EA Part 3 IRS Collection: Liens, Levies, and Due Process Rights

The IRS Collection Process: Overview

When a taxpayer fails to pay a tax liability after assessment and notice and demand, the IRS has powerful tools to collect. Collection procedures are among the highest-yield topics on Part 3 — and among the most practically important skills an EA can develop. The two primary collection tools are the federal tax lien and the levy.

Understanding the sequence matters: assessment → notice and demand → lien arises → notice of lien filed → levy notice issued → levy.

The Notice of Federal Tax Lien (NFTL)

How the Lien Arises

A federal tax lien arises automatically by operation of law when: (1) an assessment is made, (2) the IRS demands payment, and (3) the taxpayer fails to pay within 10 days. At this point the lien exists against all of the taxpayer's property and rights to property — but it is not yet public.

Filing the NFTL

To gain priority over subsequent purchasers, judgment lien creditors, and security interest holders, the IRS must file a Notice of Federal Tax Lien in the appropriate public records office (typically the county recorder or Secretary of State). Filing makes the lien public and perfects the IRS's priority position.

Lien Modifications

The IRS has four tools for modifying or releasing a lien — all testable on Part 3:

• Release: The lien is extinguished when the liability is satisfied, becomes legally unenforceable, or a bond is accepted. The IRS must release a lien within 30 days of satisfaction.
• Discharge: Removes the lien from a specific piece of property (e.g., to allow a sale), while the lien continues against remaining property.
• Subordination: The IRS agrees to allow another creditor (such as a lender) to take priority over the federal tax lien on specific property. Subordination does not release the lien — it only adjusts its priority position.
• Withdrawal: The IRS withdraws the public filing, removing the lien from public record. Withdrawal is appropriate when it will facilitate collection or when the NFTL was filed in error. Unlike a release, a withdrawn lien may be refiled.

Levy: Seizing Property

What Can Be Levied

A levy is the IRS's legal right to seize property to satisfy a tax debt. The IRS may levy on wages, bank accounts, accounts receivable, retirement accounts, Social Security benefits (up to 15%), and real property. Certain property is exempt from levy, including:

• Unemployment benefits
• Workers' compensation
• Certain annuity and pension benefits
• Minimum weekly wages (a statutory exempt amount)
• Certain public assistance payments

The Levy Notice Requirement

Before levying on property other than a jeopardy situation, the IRS must issue a Final Notice of Intent to Levy and inform the taxpayer of their right to a Collection Due Process (CDP) hearing. This notice must be given at least 30 days before the levy.

Jeopardy Levies

In situations where the IRS determines that collection is in jeopardy — the taxpayer is about to depart the country, conceal assets, or dissipate property — the IRS may issue a jeopardy levy without the usual 30-day waiting period.

Continuous Levy on Wages

Unlike a bank account levy (which is a one-time snapshot), a wage levy is continuous — it attaches to each paycheck until the liability is paid or the levy is released.

Collection Due Process (CDP) Hearings

When CDP Rights Arise

A taxpayer has the right to request a CDP hearing within 30 days upon receiving either:

1. A notice of NFTL filing, or
2. A Final Notice of Intent to Levy

What Can Be Raised at a CDP Hearing

At the CDP hearing, the taxpayer may:

• Challenge the appropriateness of the collection action
• Propose a collection alternative (OIC, installment agreement, Currently Not Collectible status)
• Challenge the underlying liability only if the taxpayer did not receive a prior opportunity to dispute it

After an adverse determination at the CDP hearing, the taxpayer has 30 days to petition Tax Court for review.

Collection Appeals Program (CAP)

The Collection Appeals Program is a faster, less formal appeal right available for disputes over specific IRS actions, including:

• Before or after a levy
• Before or after a seizure
• Rejection or termination of an installment agreement

Unlike CDP, CAP decisions cannot be appealed to Tax Court. CAP is best used when speed is more important than the right to judicial review.

The 10-Year Collection Statute of Limitations

The IRS has 10 years from the date of assessment to collect a tax liability. This deadline is called the Collection Statute Expiration Date (CSED). After the CSED, the IRS generally cannot collect the liability.

Certain events toll (pause) the CSED:

• Pending OIC (while under consideration + 30 days)
• CDP hearing pending (+ 30 days after final determination)
• Bankruptcy proceedings
• Taxpayer outside the U.S. for 6+ continuous months
• Installment agreement (while in effect)

EA candidates should know both what starts the CSED (the date of assessment) and what pauses it.

Innocent Spouse Relief

When spouses file a joint return, both are jointly and severally liable for the tax. Innocent spouse relief provides an escape from that liability in certain circumstances.

• Form 8857 (Request for Innocent Spouse Relief): The primary vehicle for claiming innocent spouse relief, separation of liability, or equitable relief. Must generally be filed within 2 years of the date the IRS first attempted to collect from the requesting spouse.
• Form 8379 (Injured Spouse Allocation): Used when a joint refund is, or will be, applied to offset a pre-existing debt owed by only one spouse. This is not innocent spouse relief — it is a mechanism to protect the non-debtor spouse's share of a refund from being seized by the IRS or other agencies.

The distinction between Forms 8857 and 8379 is a consistent Part 3 question.

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