What is a Federal Tax Lien and How Do You Resolve It?

Business owner working at laptop

When you’re running your business, you’re juggling many priorities all at once. Financials, marketing, inventory, customer service – it all needs to be prioritized to keep it running smoothly. A major priority you’ll need to stay on top of is your taxes. What happens if you miss a tax deadline? Well, you may need to deal with a tax lien before you can really grow your business.

If you have a tax lien, don’t panic! This is an issue that can be resolved. Here’s what you need to know about tax liens, how you can address them, and the impact they can have on your business.

What is a tax lien?

If you have an unpaid tax bill with the Internal Revenue Service (IRS), a tax lien can be filed against you. The tax lien is an effort by the IRS to ensure that you pay your outstanding tax obligations to the federal government.

Liens allow the government or a lender to claim your personal property if you don’t pay your taxes or loan. When a tax lien is filed, it’s recorded as a public record. Even though tax liens no longer appear on your personal credit report, they do show up on business and commercial credit reports. Both paid and unpaid tax liens will also show up in a Lexis Nexis search, which all banks and lenders conduct when making a decision about a loan application.

Resolving a tax lien will take time and effort, but it’s well worth it, especially when you’re applying for a business loan.

How does a tax lien affect your business?

Having a tax lien against you or your business can make it difficult to get a business loan when you need one. When a lender runs their Lexis Nexis search on your business, finding an outstanding tax lien could make you ineligible for financing.

More importantly, the lien will be attached to your current assets and any future assets you own. That means the IRS can claim your property, vehicle, or securities to recoup their loss. It will also attach to all your business property, including your accounts receivable. When the IRS takes an asset to recover payment, that’s called a levy.

This is why it’s so important to stay on top of your personal and business tax filings. The best way to avoid a tax lien is to file and pay your taxes in full and on time. If you’re ever in a situation where that’s not possible, reach out to the IRS right away to find out more about your options.

It’s never too early to start tax planning, so be proactive to ensure you’re always in compliance.

How to resolve a federal tax lien

The best way to resolve a federal tax lien is to pay your full tax debt. When you do pay it off, the IRS releases the lien within 30 days. If you’re unable to pay the lien in full, there are a few options that may be available to you.

You might be eligible for a discharge of property that removes the tax lien from a specific property. Discharging the property does not negate your responsibility to pay what you owe. It can allow you to refinance the property to keep more money in your business and allows you to sell the property without the burden of the lien.

You might also be eligible for subordination, which doesn’t remove the lien but allows other creditors to be ahead of the IRS. This is important to lenders so that their interest in the property will take priority over the IRS’s. This could make it possible for you to get financing when you need it despite the lien.

A withdrawal of the lien removes the public record of the lien, but you’ll still need to pay the debt to fully resolve it. Withdrawals can be done in a few different ways depending on your circumstances, so let’s take a look at your options

How to withdraw a federal tax lien

As previously mentioned, withdrawing a federal tax lien removes it from the public record but maintains your obligation to repay what you owe. There are two withdrawal methods that were made possible through the IRS Fresh Start initiative in 2011.

You could be eligible for these methods if your unpaid balances are under a certain dollar amount and in good standing with the IRS.

To qualify for this initiative after your tax lien is paid off and released, you’ll need to have taken a few actions ahead of time to also remove it from the public record. For one, you’ll need to have stayed in compliance with the law for the past three years filing individual, business, and information returns. You’ll also need to be current on all estimated tax payments and federal tax deposits.

If your lien is still being paid off, here’s what you’ll need to qualify for the initiative:

  • Owe no more than $50,000 in taxes
  • Have your Direct Debit Installment Agreement on track to pay off the entire amount owed within 72 months or before the Collection Statute expires, whichever is earlier
  • Be fully compliant with all other payment and filing requirements
  • Have at least three consecutive payments made in the direct debit payment plan
  • Have no defaults on your Direct Debit Installment agreement with the IRS

With the withdrawal of the tax lien, you’ll ensure that other creditors aren’t competing with the IRS for your property while you work towards paying off the tax debt.

Keeping your business tax-debt-free is your best bet

Having a tax lien on your business can make it difficult to get the financing you need to grow and thrive. While it’s not impossible to get funding with a tax lien, it’s likely to cost you more with a higher interest rate, shorter terms, and other criteria that reduce the risk to the lender. The best approach is to always pay your tax obligations in full and on time. There’s never a bad time to start planning your tax strategy, so get in touch with your tax professional or CPA today to get started. If you need

help addressing a tax lien or other financial issue that may be preventing you from getting a loan, talk to Pursuit! Our business advisors can refer you to services that can get you in shipshape for financing.

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