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Updated: March 27th, 2020
Failing to pay your taxes in a timely manner can have serious repercussions for your business. Not only will you pay penalties and interest on the balance owed, but the IRS could also enforce collection actions in the form of a tax lien. If you’re at risk of incurring a tax lien because of an unpaid tax bill, it’s essential to understand what it is, the consequences it carries and how to get it resolved.
A tax lien is a form of recourse used by a government agency to collect an outstanding debt. Liens can be issued by the IRS or by your state revenue agency, when your business has a tax delinquency.
Effectively, a tax lien acts as a claim against the business’s assets. The purpose of the lien is to protect the government’s interest in said property, which may include real estate, bank accounts, intellectual property, and physical property such as equipment owned by the business.
It’s important to note that a lien is different from a levy. A lien gives the IRS or state revenue agency the authority to make a claim against your business assets. A levy is a separate action by which the government seizes your property or assets to satisfy a tax debt when you fail to pay.
A tax lien can impact your business in several ways. First, there’s the possibility of losing your assets or other property if the IRS decides to pursue a levy. If you’ve invested a substantial amount of capital in real estate or equipment, you would not be able to recoup the loss of those assets once a levy takes effect.
Your business credit, and potentially your personal credit, if you operate as a sole proprietor or partnership, would also be damaged. A tax lien is treated as an unpaid debt for credit reporting purposes – the longer it remains unpaid, the more detrimental it is to your credit score. You will have great difficulty getting approved for a term loan or line of credit, with a lien on your credit history.
If you plan to sell your business, a tax lien can complicate things. It may be possible to get approval from the IRS for the sale of the business if the debt will be satisfied from the proceeds. However, the buyer may have trouble finding a lender willing to grant a loan to complete the purchase when there’s a lien in place.
The most effective way to resolve a tax lien is to pay your business’s tax obligation in full. Once the IRS receives payment, the lien must be released within 30 days. If you need to sell property that’s affected by the lien, you can request a discharge for that specific asset. Keep in mind that this will not remove the federal lien notice itself.
Subordination is another option. While it will not remove the lien, it does allow other creditors to take priority over the IRS. That can be useful if you’ve been unsuccessful with loan applications, because of the lien’s impact on your credit.
You can also request a withdrawal of the lien. This removes the public notice from your tax record, but it does not eliminate your responsibility for the balance owed. A withdrawal may be a suitable option for business owners who are eligible to repay the debt through an Installment Agreement.
While these options resolve a lien from a tax standpoint, the lien is not automatically removed from your credit history. An unpaid lien can remain on your report indefinitely. A paid lien can linger for up to seven years from the date it is released. This is why even if you’ve handled your lien(s), your credit report might not reflect the repayment. Luckily, resolving this issue is fairly easy. Simply contact the county, state or federal department that had issued the lien, and ask for the release form. Once you are able to provide proof of payment, your loan application may have the potential to be re-opened.
Once the tax bill has been paid or a withdrawal has been granted by the IRS, you’ll need to initiate a dispute with each business and consumer credit bureau that reports the lien information. You’ll also need to follow the same procedure with any resolved state tax liens.
The tax collection process is not perfect and it’s entirely possible for you to receive a lien notice through no fault of your own. If you find that a tax lien has been filed in error, you have the right to appeal it with the IRS or your state revenue agency, through an administrative hearing.
Once the hearing determines that the tax debt in question does not belong to your business, the lien must be released. You would still, however, have to take additional action to have the lien removed from your credit report.
Samantha Novick is a senior editor at Funding Circle, specializing in small business financing. She has a bachelor's degree from the Gallatin School of Individualized Study at New York University. Prior to Funding Circle, Samantha was a community manager at Marcus by Goldman Sachs. Her work has been featured in a number of top small business resource sites and publications.