For a variety of reasons, your firm owes the IRS back taxes well into the five (or maybe even six) digits, and the IRS places a tax lien on your business. It's laid claim to your restaurant, including its equipment and the fully paid off building it's been in for 35 years. You have ten days to pay, or else the lien goes into effect and your assets will be seized as part of a levy action.
Most of us don't like thinking about worst-case scenarios. But when you're running a business, knowing all potential outcomes to a problem — and their consequences — is part of the job description. With that in mind, here's what you should know about the ugly business of tax liens.
What happens when you get a tax lien?
When your tax lien remains unpaid, the government reserves the right to seize your assets, including real property and bank accounts, until the obligation is fulfilled. This lien enforces the government's right to get paid before your other creditors. If you fail to meet your obligations, the IRS gets paid first; the others can wait in line for whatever's left.
A tax lien will impact your business plans.
Until recently, a tax lien would appear as delinquency on your business credit report. However this changed in 2018, when all three credit bureaus — Experian Equifax, and TransUnion — agreed to remove all tax lien data.
If you're involved in a tax lien, this is great news. But you're not totally in the clear: A tax lien remain a matter of public record, since it is a legal claim. What's more, if a tax lien lays claim to real property or a bank account, those claims will be noted on your credit report, while not impacting your score.
Bottom line? A tax lien is a major red flag for lenders. After all, if you were late paying the federal or state government, would anyone else stand a chance of getting repaid?
Before applying for a business loan or capital funding, it makes sense to address your lien obligations first. Here's why:
If you get approved for a business loan when you have an active tax lien, you'll probably be charged high interest rates that will further impede your ability to pay the government or your new creditor.
Your business's cash flow will take a hit, since you'll be using a significant amount of funds to repay your loan.
By waiting, you'll most likely get a lower interest rate that won't hinder your business operations.
Two pathways to getting approved for a business loan.
Even if you've been repaying your IRS debt on time, a potential creditor will consider your business to be large risk. Knowing this, the IRS offers two potential options:
Subordination removes the government's right to be the first creditor paid if you default on your obligations. For a business lender, this is a big deal, since you're removing a large amount of risk. The IRS provides instructions on subordination eligibility and how to apply for it.
Withdrawal removes the public Notice of Federal Tax Lien, though you're of course still liable for the balance. Getting your lien withdrawn is one of the best-case scenarios for businesses in tax debt.
Can you avoid a tax lien?
Yes, you can avoid this drastic action. If you can't afford to pay your tax bill on time, work with the IRS to come up with alternatives. It's in its best interests to work out a payment plan with a willing taxpayer. You can:
Create a monthly installment payment plan that works for your business.
Obtain a temporary delay of collection.
Agree upon an "offer in compromise". If you meet the criteria, you can settle your business tax debt for less than the full amount.
If you fail to respond to IRS communications and ignore their legal claims, you could make your financial situation even more complicated. Educate yourself so that you understand the benefits and downsides of each course of action. This will give you the best shot at getting back to business as usual.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.