In 2020, the IRS received 60.3 million tax returns with additional taxes due. However, by the end of the tax filing season, around 8.4 million of those tax bills remained unpaid. 

When a business owes taxes to the federal government and fails to pay them, the Internal Revenue Service might file a tax lien against the company. If your business is behind on its taxes, it’s best to find a way to avoid a tax lien if you can. 

Tax liens can make it difficult, sometimes impossible, for your business to borrow money. Far more concerning, a tax lien might be detrimental to your entire business operation and could have severe ramifications for your finances as a business owner. 

What Is a Business Tax Lien? 

A business tax lien, at its core, is a legal document. The document gives the government a claim against all of your business property. 

When a business has unpaid tax obligations, the government can use a tax lien to preserve its rights to seize assets that might help satisfy that delinquent debt. Everything from your business bank accounts to equipment to real estate holdings and more could be at risk. 

The purpose of the filing is two-fold. A tax lien: 

• Puts pressure on a tax debtor to resolve its delinquent tax bill.
  
• Moves the government to the front of the line, ahead of any other creditor’s claim on your assets. 

When the IRS files a federal tax lien against your company, a ticking clock starts. You have ten days from the date of filing to pay your full tax obligation or the lien will go into effect. 

In addition to the IRS, a state may file a tax lien against your company as well. So, it’s in your company’s best interest to stay current on tax payments at both the state and federal levels. 

How Can a Business Tax Lien Affect Me? 

As a business owner, a tax lien can make life difficult in several ways. For starters, once a tax lien is in place, the government can escalate matters and use a tax levy to seize funds from your bank account, take possession of your property, and more. 

A tax lien could also have a negative impact on your business credit. The business credit bureaus may include tax lien filings on commercial credit reports. 

When a business credit reporting agency adds a tax lien to your company’s credit report, it may lower your business credit score. And if you’ve been working hard to build good business credit, a blow like a tax lien could be especially painful. 

There’s another credit complication to consider too. Unlike consumer credit reports, anyone willing to pay for your company’s information can buy a copy of your business credit report and see the IRS lien or state tax lien filed against your business. 

Even if you’re lucky and the tax lien doesn’t show up on your business credit report, it’s still a public record. That means there are other ways creditors and investors might detect it. 

As a result, you may not qualify when you apply for business financing in the future. And on top of future lenders being hesitant to do business with you, tax liens could be a turn off to potential investors, vendors, and business partners too.

How to Get Rid of a Tax Lien

In 2020, the IRS filed close to 300,000 federal tax liens. 

The easiest way to fix a federal tax lien is for your business to pay the IRS the money it owes. If your company can’t afford to pay its tax obligation, you might consider applying for a business loan or 0% APR business credit card promotion to finance the debt over time.

Once you pay off a tax lien, the IRS will file a release within 30 days. This removes the government’s claim on your property. 

However, if you don’t have the money to pay the government and you can’t (or don’t want to) finance unpaid tax debt with an outside lender, there are other options you can consider. 

Discharge of Property

You can fill out a request on behalf of your business to discharge the lien from certain property. If you’re eligible for a certificate of discharge, it might permit you to sell property or refinance a loan to free up funds you can use to pay the government. 

The IRS website provides information about the different hoops you’ll need to jump through in order to qualify for a lien discharge — including the completion of an application (Form 14135). You can also reach out to the IRS Collection Advisory Group for more information. 

Subordination

Another potential move you can make is to apply for subordination that lets certain creditors move ahead of the IRS. Subordination could make it easier for your company to qualify for a business loan or other financing it could use to resolve its outstanding tax liability. 

IRS Publication 784 provides details you’ll need to follow if your business wants to request a Certificate of Subordination. And there’s also a video entitled “Selling or Refinancing When There Is an IRS Lien” that can provide more insight to guide you.  

Withdrawal

You might be able to convince the IRS to withdraw the tax lien against your business entirely. Withdrawal does not mean you no longer owe the debt. However, it removes the public record filing and signifies that the government won’t compete with other creditors for your assets. 

To apply for a withdrawal, you’ll want to complete Form 12277. You’ll also need to meet eligibility requirements, including: 

• The satisfaction and release of your tax lien.
  
• Being in full compliance with the IRS (business tax returns, individual tax returns, etc.) for three or more years.
  
• Maintaining a current status with all of your estimated tax payments and federal tax deposits.

There is a scenario where you could qualify for a tax lien withdrawal before paying the full debt. But you’ll need to (a) owe $25,000 or less, (b) sign up for a Direct Debit installment agreement (c) make at least three direct debit payments in a row, and more to be eligible. 

How Can You Prevent a Business Tax Lien? 

The IRS often waits until it has sent out five collection notices before filing a tax lien against your business. And if you owe less than $10,000 in back business taxes, your company might not be on the receiving end of a tax lien at all. 

Just be aware that these rules are not set in stone. Your experience could differ. 

The best way to avoid a business tax lien is for your business to pay off its full outstanding debt to the government. But there are some cases where entering into a payment plan might be enough to keep matters from escalating. 

Note that if your company’s outstanding tax balance is $25,000 or higher (but not more than $50,000), you may need to agree to a Direct Debit arrangement. This installment agreement gives the IRS permission to draft funds directly out of your business bank account. 

Can Tax Liens Also Be Filed Against My Personal Assets? 

The federal or state government can file tax liens against both business and personal assets in some situations. Your business entity structure has a lot to do with whether or not your personal assets are protected, though there are other factors at play as well. 

• Sole proprietors in particular are vulnerable when the government files a tax lien against their business. As a sole proprietor, you and your business are essentially the same from the IRS’ point of view.
  
• Corporation and limited liability company (LLC) owners typically enjoy more personal protection where business tax liens are concerned.
  
  LLCs that file an election to be treated as a corporation (Form 8832) may be exempt from personal property levies (though not always).
  
  LLCs without the corporate election might face levies on personal property, but there are some items that the IRS will typically leave alone.
  
  And if the IRS can find grounds to “pierce the corporate veil,” you might lose the personal liability protection that incorporating can provide.
  

Because there are scenarios where your personal property could be at risk, it’s wise to seek legal advice when you’re facing a business tax lien. You can check with your local bar association if you need a recommendation for a reputable tax attorney in your area. 

What If You’re Not Able to Pay? 

Falling behind on your business taxes can be incredibly stressful. Even bankruptcy might not wipe out your tax debt or resolve a federal or state tax lien filing.

However, you may be able to work something out with the IRS or state government even if resolving the full bill or making big payments seems financially out of reach. 

Some options you might want to consider are asking for a discount or setting up an affordable payment arrangement. If you’re fortunate, you might be able to get the IRS to accept an Offer in Compromise — a type of settlement that could resolve your tax debt for pennies on the dollar. 

Keep in mind that ignoring the government shouldn’t be your go-to approach when your business owes a tax bill it can’t afford to pay. In fact, trying to avoid your business tax debt will only drive up the balance and limit your options. 

Remember that as a delinquent taxpayer, your best bet is to consult with an attorney with experience in tax law. A tax attorney can review your situation, discuss potential solutions, and help you determine the best course of action to protect your business. 

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