Business tax liens can hurt your finances, your credit and can possibly even put your business in jeopardy. “A tax lien can be devastating to you and you should do everything you can to avoid it,” says Barbara Weltman, attorney and author of J.K. Lasser’s Small Business Taxes.
What is a business tax lien?
Here’s how this goes down. The IRS says you (or your business) owes taxes. It sends you a notice (Notice and Demand for Payment). You don’t pay.
The IRS then files a public record document called a “Notice of Federal Tax Lien.” It alerts creditors that the IRS has a legal interest in your property for an unpaid tax or a delinquent tax bill. (And, by extension, it often indicates you or your business has financial problems since you can’t pay your taxes.)
How do tax liens affect your credit?
Remember the public record document we just mentioned? There are companies that scour public record information at courthouses around the country and then supply that information to credit reporting agencies, and in turn, the credit bureaus may report them on your business credit report. Business tax liens typically appear on commercial credit reports (D&B, Experian, for example). Personal tax liens traditionally appear on personal credit reports (Experian, Equifax, TransUnion, for example); however, due to new credit reporting standards they are disappearing from these reports.
An IRS tax lien is considered very negative and will almost always cause your business credit scores to drop, and may result in a rejection when you apply for credit.
A tax lien can be devastating to you and you should do everything you can to avoid it.
Tax liens are filed in the same database as UCC filings. Although UCC filings are considered consensual because they are typically associated with a small business loan, a line of credit, or a new credit card. Tax liens are considered non-consensual or statutory liens because they don’t involve a contract with a creditor like a UCC lien. Statutory liens are not limited to federal tax liens either. A state tax lien or a judgement lien, occur by operation of law. Statutory liens arise without your permission or consent.
Tax Liens Can Be Filed Against Personal or Business Assets
As we already mentioned, tax liens can be filed against both personal and business assets. If you’re business is run as a sole proprietorship, as far as the IRS is concerned, you and your business are basically the same—so you should probably expect a tax lien on your business assets will include a lien on your personal assets as well.
Additionally, a business tax lien typically shouldn’t affect your personal credit reports or scores unless you are a sole proprietor, in which case you and your business are one. (Even then, tax liens are being removed from personal credit reports.) There are times, however, that the IRS can hold the business taxpayer liable personally for debts of the business. If the IRS attempts to do this to you, you’ll want to get advice from a tax attorney.
How to Have a Tax Lien Removed
Your first goal is to pay off your tax liability. If you do, you can get the tax lien released. The IRS releases a tax lien thirty days after the tax bill is paid in full. But “released” doesn’t mean “removed;” it’s still a matter of public record. You can apply to have it withdrawn—which removes it from the public record—if you are in compliance on all your tax returns (personal and business) in the past three years and you are current on your estimated tax payments and federal tax deposits, as required.
You may also be able to get the lien withdrawn before it is paid in full. How? You’ll need to enter into a direct debit installment agreement to pay your tax debt in five years or less, meaning you agree to have the payments automatically deducted from your bank account. The owed tax obligation can’t be more than $25,000. After three direct debit payments on this program, you may apply to have the lien withdrawn. (For specific details, see IRS Form 12277).
Once it’s been withdrawn you can notify the credit reporting agencies with a copy of the document you received from the IRS confirming the withdrawal. Generally they will stop reporting it, though there is no federal law that limits how long they can appear on business credit reports.
How can you prevent a business tax lien?
Stay on top of your bookkeeping and current on your tax filings. If you find you owe more than you can afford to pay, you may want to consider an installment agreement with the IRS or get a small business loan (or even a personal loan) to pay off the debt.
Here are what we what we consider some of your best business loan options.
What if you can’t pay?
If you can’t pay your business taxes, you may be able to negotiate a discount or “offer in compromise” to resolve the debt for less than you owe. Bankruptcy may be an option for some older tax debts. And in particularly difficult situations, you may be able to get your account placed into “uncollectible” status, where you won’t continually hear from the IRS (though fines and penalties will continue to accrue). If you have tax debt you can’t pay, it’s a good idea to talk with a reputable tax professional to go over your options.
Editor’s note: This story was updated April 25, 2018 to reflect the fact that tax liens will no longer be reported on personal credit reports.