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What is a tax lien and how does it affect your business?

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Last editedAug 20203 min read

If you don’t pay your taxes on time, there could be serious financial consequences for your company. Not only could you be facing penalties or interest payments, but the IRS can enforce collection via a tax lien. If your business is at risk, it’s vital to understand how a tax lien on a business works and how you can get a tax lien release from the federal government. Get the inside track on tax liens with our simple guide. First up, what is a tax lien?

What is a tax lien?

A tax lien is a form of recourse used by the government to collect outstanding debts (unpaid taxes). They can be issued by the IRS or your state revenue agency if your business has an issue with tax delinquency. So, how does a tax lien on a business work? It’s relatively simple.

Essentially, a tax lien is a claim against the business’s assets, such as real estate, intellectual property, bank accounts, and physical equipment. The tax lien will stay in place until you’ve paid off the full amount that you owe (including additional charges or interest).

Tax lien vs. tax levy

It’s important to understand the difference between a tax lien on a business and a tax levy. Whereas a tax lien is simply a claim against your business’s assets, a tax levy is the actual seizure of property to repay your back taxes. This can take many forms, including seizing your assets or bank accounts or garnishing your wages. Essentially, it’s the next step in the process, and if you don’t take care of your tax lien, the government may implement a tax levy to satisfy the debt.

What is the impact of a tax lien on a business?

A tax lien on a business can have several significant effects. Aside from the possibility that the government will pursue a tax levy, your business’s creditworthiness is likely to be damaged.

This could jeopardize your chances of getting a loan, while it’s important to remember that the longer that your debt goes unpaid, the more damage will be done to your company’s credit rating. In addition, a tax lien could complicate any plans you have to sell your business, as buyers may find it difficult to get a loan to complete a purchase on a company dealing with a tax lien.

How to get a tax lien release

If you’re dealing with a tax lien and you need a tax lien release, there are several different options:

Pay your taxes – It sounds simple, but in many cases, paying your tax debt is the only way to remove a tax lien. Keep communicating with the IRS or state revenue agency that you’re dealing with and pay your obligation in full. Once your taxes have been paid, the IRS must provide you with a tax lien release within 30 days.
Request an Offer in Compromise – If you can’t pay the full amount, you could submit a request for an Offer in Compromise, which is essentially an offer to settle the dispute for less than the full amount. The IRS rejects most of these requests, and the requirements are relatively strict. To be considered, you’ll need to have filed all your tax returns and made the estimated tax payments for the current year.
File for an appeal – If you want to request a review of your tax lien, you can request a collection due process hearing with the IRS.
Declare bankruptcy – The final course of action could be to declare bankruptcy. Although bankruptcy may help you to get rid of the tax debt, it’s important to note that it’s not always a sure thing and in some cases, bankruptcy won’t solve the problem.

Disputing a tax lien filed in error

It’s possibly that you could receive a tax lien on a business despite having paid all your taxes in full. The IRS is a large, federal agency and as with all complex organizations, mistakes sometimes happen. If you have been hit with an erroneous tax lien, you can appeal with the IRS or your state revenue agency. After a hearing has determined that the tax debt doesn’t belong to your business, you will receive a tax lien release. However, you may need to take extra steps to remove the tax lien on your credit report.

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