I’ve Received a Tax Lien For My Business. What Do I Do?
Received a tax lien on a business asset(s)? Here's how liens work and what you can do to get out of them.
FlowFi
Tax Accountant
So What is a Tax Lien For Business?
A tax lien is:
A claim against a business’s assets (Any item of monetary value owned by your business)
Issued by a governing authority (federal, state, municipal government)
As a means to collect tax debt
A lien does not let a government collect your debt by force. You still need to pay them on your own. It is the first step in the process the government uses to pressure a delinquent taxpayer to pay up.
To actually forcibly take your property or money, the government needs to escalate to a tax levy. This can definitely happen if you do not pay up or respond to your lien.
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NEED HELP MANAGING A TAX LIEN? The first step is historic bookkeeping.
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What Triggers a Business Tax Lien?
Business tax liens are triggered when a government:
Believes that you owe taxes that you haven’t paid.
Has already solicited your business for payment and received no response.
The IRS can issue a lien within 10 to 30 days of a delinquent tax payment, though they usually won’t if your total debts are lower than $10,000. They are also likely to look into issuing a tax lien near your tax debt expiration date of 10 years in an attempt to recover.
What Does a Tax Lien Do To Your Business?
Tax liens:
Hurts business credit – While liens don’t normally show up on credit reports, they are easily searchable and may cause lenders to reject you outright.
Can hurt vendor relationships – If a vendor catches wind of a tax lien, you may not be able to attain attractive payment terms like net-30.
Can block refinancing – If you try to take out a new mortgage on any liened assets to pay off the lien.
Block sales of business assets – Unless they are used to pay off said lien.
Can freeze accounts receivable – Until you pay off the lien.
How to Resolve a Business Tax Lien
Pay it off in full – A federal lien paid in full should be lifted in 30 days. It will, however, remain on your record.
Pay in installments – A lender’s priority is to get their money and most government orgs will gladly accept an installment plan if it means you’re better able to pay.
Apply for a discharge of property for a loan – At times, the government is willing to let you discharge the lien from an asset for you to take out a loan against it to pay off the lien.
Try to settle – Most tax collection agencies would rather collect something over nothing at all. With the IRS, this is called an offer in compromise (OIC). To receive an OIC, you will have to prove to the IRS that you are personally unable to pay your business debts. The amount of income you’ll need to show varies. You’ll want to request an OIC before your lien gets upgraded to a levy, as those are hard to reverse.
Try to obtain a CNC — A currently not collectable status is reserved for individuals who are personally liable for their tax debt and can demonstrate they currently aren’t making enough money to pay the debt and living expenses. Successful filing means the debt still exists, but the IRS will stop searching for it for a couple of months or years.
Contest the lien – If you feel the debt amount is incorrect, unjustified, or filed incorrectly, you can attempt to contest any lien.
Does bankruptcy eliminate tax liens?
No, since liens are attached to your business assets and bankruptcy does not eliminate business assets, you still may be liable to pay the debt. However, most bankruptcies offer at least temporary relief from tax debt and more flexibility with repayment.
Can You Be Held Personally Liable For a Business Tax Lien?
If you receive a lien, it means the government is expending effort to get its money from you. They can and will try to make you personally liable for your business debts if you haven’t taken steps to separate yourself.
Sole proprietorship/LLC - You are liable for your business income because the government treats business and personal income/assets the same. The government can even issue the levy to an outside W-2 employer and get first dibs on your salary until the debt is paid.
S-corp/C-corp – In these models, you are legally an employee of the business, so they cannot come after your personal wage. This can change if the government decides you have avoided payroll taxes or mixed business and personal funds.
The Most Dangerous Type of Business Tax Lien: Payroll Tax Default
If you received a lien because you have not been paying payroll taxes, the government can and will hold you personally liable. They can use a mechanism called the Trust Fund Recovery Penalty to bust the corporate veil and attack your assets.
Why can they do that? To make it simple, part of your payroll tax is called the employee trust fund (income tax and employee’s share of FICA that employers withhold from employee wages), which technically belongs to the US Treasury. They consider avoiding these taxes as theft.
Even worse, the TRFP can be assessed if the business has closed or even is in bankruptcy. Check out the IRS page on the subject here.
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Who You Should Call to Help You With a Business Tax Lien
Professional help with a tax lien varies based on your financial situation:
Tax Attorneys: Tax attorneys are best for complex, non-standard cases as they specialize in litigation, appealing lien filings, or addressing issues involving asset shielding and suspected fraud.
CPAs and enrolled agents: CPAs and enrolled agents are fine for any standard negotiations with the IRS like an Offer in Compromise (OIC) or setting up installment agreements.
Low-income taxpayer clinics (LITCs): If you meet certain income thresholds, you may qualify for free legal representation from an LITC. The amount in dispute with the IRS is usually less than $50,000. They generally act as pro bono tax attorneys and they aren’t used for filing yearly tax returns.
Taxpayer Advocate Service (TAS): This is an independent IRS organization that helps taxpayers resolve disputes or undo severe hardships caused by tax liens.
The First Step to Resolving a Tax Lien: Historic Bookkeeping
If you have a business tax lien, you need accurate historical financial records. They are your shield against the IRS piercing your corporate veil to collect funds from you personally.
Historic bookkeeping can help you if you wish to renegotiate your tax debt or claim the lien was placed inaccurately.
At FlowFi, we’re the leading curated marketplace for businesses looking for historic bookkeepers, CFOs, or general tax advice.
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