If you’ve been issued a tax lien, it’s essential to act decisively to avoid any further damage to your business. Decisive action starts with understanding the basics of a tax lien, so in this post we'll explain how you can still receive business funding if you're faced with this predicament.
What Are Tax Liens?
The government uses tax liens to collect unpaid debts. The IRS or your state tax agency may issue a tax lien. The lien is the government’s legal way of saying that they have priority on being paid for the debts you owe. When a tax lien is filed, your credit card company, business lender, and anyone else you owe money take a backseat to the government.
If the tax lien remains unpaid, the government may levy your assets. That means they’ll come after your property or bank accounts to fulfill your tax obligation. If the IRS files a tax lien against you, you’ll have ten days to pay the balance in full before the lien becomes effective.
How a Tax Lien Affects Loan Eligibility
The most immediate effect of a tax lien on your business is the impact it has on your credit score. Unfortunately, even if you pay your lien in full, the lien will appear on your credit report for years to come (perhaps longer if you fail to pay or delay payment).
Even if you’re lucky enough to avoid a major impact on your credit report, you’ll still face problems when applying for a small business loan
So, can you get a business loan with tax liens, or will it hurt your ability to qualify for business funding? Well, a tax lien is a major red flag for alternative lenders, and it’s easy to see why if you consider their perspective. After all, if you were late paying the federal or state government, what should make your lender believe that they’ll be paid on time.
If you get approved for a business loan when you have a tax lien, you’ll probably be charged high interest rates. This will make it very challenging to pay off your outstanding lien and the loan. In addition, it could affect your business's cash flow, because you'll be using a significant amount of funds to repay your loan.
Instead, we suggest handling your lien first, then pursuing a small business loan
. That way, you’ll be more likely to get approved for business financing, and you’ll probably get offered financing that isn’t as expensive.
To ensure that your lien has been cleared, make sure that you receive a tax lien certificate from the government. That way, you can prove that you no longer have a business tax liability.
How to Avoid a Tax Lien
The simplest way to avoid a tax lien is to pay your tax bill in full and on time. In some cases, a tax lien may be filed mistakenly. If this happens, you must act fast to dispute the error with the IRS.
If you can’t afford to pay your tax bill on time
, you should still try to make other arrangements
, such as following an installment payment plan.
The IRS offers monthly installment payment agreements, a temporary delay of collection, or what’s called an “offer in compromise.” This allows you to settle tax debt for less than the full amount, but you will need to meet certain criteria to qualify.
Whatever your situation, do not avoid the problem by ignoring letters from the IRS. If you avoid their legal claims, you could make your financial situation even more complicated.
How to Recover from a Tax Lien
As we mentioned earlier, even if you pay your tax lien in full, you’ll still have it on your credit report for several years. This means that lenders will still be cautious about working with you.
The IRS offers two potential options for people who are trying to recover from a tax lien:
When you “subordinate” a tax lien, you give other creditors (like a business lender) the legal power to collect their debts from you before the government can.
For any type of business lender, this is a big deal; if the lien isn't subordinated, the lender won’t receive a penny until your entire debt to the government is paid. That makes lending to you very risky.
With subordination, you remove that risk for the lender, making it less risky for them to lend to you. The IRS provides instructions on how to apply for a certification of subordination which should help you determine eligibility.
According to the IRS website, “A ‘withdrawal’ removes the public Notice of Federal Tax Lien.”
This is significant because it means the lien will no longer be reported to the credit bureaus. However, having a tax lien removal doesn’t mean you don’t still owe the money you’re liable for. Moreover, you’ll need to be vigilant in disputing any credit reports that still show a tax lien.
Besides avoiding a tax lien altogether, getting your lien withdrawn is one of the best-case scenarios.
Conclusion: Avoid Tax Liens to Ensure Your Ability To Qualify for Funding
If you’ve been issued a tax lien, your first instinct may be to just ignore the problem altogether. Even if it’s a mistake, dealing with the IRS or state agency may seem overwhelming. But whether you’re dealing with getting a lien removed, trying to recover from a lien, or simply trying to avoid one, your best option is to educate yourself.
Understand the benefits and downsides of each course of action, and you’ll give yourself the best chance of getting back to business as usual.
Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2021.