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How to Deal With a Tax Lien on Your Business

Mark Henricks

A middle-age couple contemplates their tax lien problems.

If you’re a business owner and you fail to pay taxes, the government could slap your business with a tax lien. That’s a document filed by the Internal Revenue Service placing a legal claim against your business property, including bank accounts, equipment and buildings; and serving notice to creditors that the government is claiming a legal right to your property. Here’s what it means and how to deal with it.

Tax Lien Risks

The lien is a step on the way to the government seizing and selling your property to pay back taxes. If you don’t take action to deal with the tax lien, that is likely to eventually occur.

This is not the same as the IRS actually seizing your assets, however. That is known as a tax levy. The tax lien is a notice informing creditors that the tax authorities are claiming your property.

This can be a serious problem in itself, however. That’s because the tax lien is a public notice. Any creditor you try to borrow from is likely to find out about the tax lien. And an IRS tax lien comes before any other creditor’s claim. So a business subject to a tax lien filed is likely to have great difficulty borrowing money. That includes money to pay the outstanding tax obligation.

Depending on the type of business, the tax lien can affect the owner’s personal property. Corporations and limited liability companies hit with tax liens may find their assets affected. Sole proprietors, however, may find their personal assets claimed by the federal government.

Tax Lien Process

It might be useful to call your tax preparer or accountant if you receive a tax lien.

If you fail to pay taxes due, you will likely receive a Notice of Federal Tax Lien from the IRS. Each year, the IRS files hundreds of thousands of such tax liens. One year during the last recession, in 2009, the IRS filed 1 million tax liens. In 2018, the number was 410,220, down from 446,378 the year before. Although tax liens are common, that doesn’t mean they should be taken casually.

The process of being hit with a tax lien starts with not paying taxes that are due. Once the IRS takes note of the overdue taxes, the taxpayer business will be sent a Notice and Demand for Payment.

If the business fails to pay within 10 days of getting the demand for payment, the Notice of Federal Tax Lien is next. Unless this tax lien is dealt with, the IRS could soon start seizing assets.

Dealing With a Tax Lien

The best way to avoid a tax lien is to pay taxes on time. That is, when they are due or, at least, after receiving a Notice and Demand for Payment.

Once the tax lien notice has been filed, the business can still resolve matters by paying the debt in full. If this is done, within 30 days the IRS will remove the tax lien.

Withdrawal

One way to deal with the tax lien is to get it withdrawn. Withdrawal is available only in certain circumstances. They include:

  • Paying the overdue tax liability
  • Being up to date on all filings for the past three years
  • Being current on estimate taxes and tax deposits

A business may also get the lien withdrawn before the debt is paid, although the business still must pay the debt eventually. To do this a business has to:

  • Owe less than $25,000
  • Set up an IRS installment loan with direct debit payments and a term of 60 months or less
  • Make three consecutive direct debt payments
  • Have no history of defaulting on other direct debit installment agreements with the IRS.

It’s best to seek an IRS loan when the original Notice and Demand for Payment is received.

Discharge of Property

Discharge of property is another method for coping with a tax lien. This can remove the lien from specific property.

The IRS will only discharge specific property if enough property will still be covered by the lien to pay the tax owed. However, getting specific property removed from the lien may allow a business more flexibility in raising money to pay the lien.

Subordination

Another way to ease the stranglehold of a tax lien is to seek to have the lien subordinated. This means the IRS is willing to take second place behind other creditors.

This can allow a business to borrow money elsewhere to pay the lien. It could also enable restructuring of the business’s debt to free up enough cash flow to pay the tax bill.

The Bottom Line

The definition of a lien, written out in a dictionary

If the IRS files a Notice of Tax Lien against your business, dealing with it has to become a priority. The best way to handle a tax lien is to avoid it by paying taxes when due. If one is received, however, there are options to lessen the potentially catastrophic impact of a tax lien.

Tips for Dealing With a Tax Lien

  • Consider talking to a financial advisor about how to avoid having your business served a tax lien. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • The Internal Revenue Service isn’t the only agency that can file a tax lien. State and local taxing authorities can also claim your business assets if you don’t pay taxes due.

Photo credit: ©iStock.com/Ridofranz, ©iStock.com/mediaphotos, ©iStock.com/Devonyu

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