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Updated: June 9th, 2023
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 of unpaid taxes 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.
This blog will serve as your guide to tax liens and what to do if you are affected by one. Read on to learn more about federal and state tax liens and how to resolve them effectively.
A tax lien is a legal form of recourse used by a government agency to collect an outstanding debt. A federal tax lien can be issued by the IRS or a state tax lien by your state revenue agency when your business has a tax delinquency.
Effectively, a tax lien certificate acts as a legal 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 and investment accounts, intellectual property, personal 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 property taxes or other tax bills.
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.
Furthermore, having a tax lien on your business can also harm your reputation among vendors, customers, and potential partners. It may signal to them that your business is not financially stable and could cause them to lose confidence in your ability to fulfill your obligations. This could result in vendors and suppliers demanding payment upfront, customers choosing to take their business elsewhere, and potential partners being hesitant to enter into agreements with your business.
Another way a tax lien can affect your business is by increasing your operating costs. If your business is unable to obtain financing due to the lien, you may have to turn to alternative sources of funding, such as high-interest loans or credit cards. This can result in higher interest rates, fees, and other expenses that can eat into your profits and make it harder for your business to stay afloat.
It’s important to note that a tax lien can remain on your business credit report for up to 10 years, even after the debt has been paid in full. This can continue to have a negative impact on your credit score and your ability to obtain financing for years to come.
Overall, a tax lien can have serious and long-lasting consequences for your business. It’s essential to take immediate action if you receive a notice of a lien to minimize its impact and protect your business’s financial health.
The most effective way to resolve a tax lien is to pay your business’s tax obligation or unpaid property taxes 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 of the taxes owed. 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.
This may involve disputing the inaccurate information with the credit reporting agencies and providing documentation to support your case. It’s important to act quickly when you become aware of an erroneous tax lien, as the longer it remains on your credit report, the more it can negatively impact your credit score and financial standing.
In addition, it’s always a good idea to keep detailed records of your tax payments and correspondence with the IRS or state revenue agency. This can help you quickly identify and address any errors or issues that arise in the future, and can also serve as valuable evidence if you need to dispute a tax lien or other collection action.
A tax lien is a claim against a taxpayer’s property, while a tax levy is the actual seizure of the property to satisfy the unpaid tax debt.
Yes, a tax lien can be removed from a credit report once it has been paid in full or if it was filed in error.
A tax lien can remain on a credit report for up to 10 years, even after it has been paid in full.
Yes, it is possible to negotiate or settle a tax lien with the IRS or state revenue agency through an Offer in Compromise or an Installment Agreement. However, these options may not be available to all taxpayers and are subject to certain eligibility requirements.
Yes, a tax lien can have a negative impact on your credit score, which can make it difficult to get approved for loans or credit cards.
Yes, a tax lien can be transferred to another property if the taxpayer sells the property that the lien was originally filed against.
The best way to prevent a tax lien is to file and pay your taxes on time. If you are unable to pay your taxes in full, you should contact the IRS or state revenue agency to arrange a payment plan or negotiate a settlement.
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.