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What is a tax lien?

What Is a Business Tax Lien?

Are you struggling to pay your business or employment tax liabilities? If you fail to pay, you might face a tax lien.

For a small business owner, a tax lien can have devastating effects. That’s why you must understand tax liens to prevent them.  

Below you will learn:

  • What a tax lien is
  • How tax liens work
  • How to avoid a lien
  • How to get rid of a lien

What is a tax lien?

A business tax lien is a government claim against your property when you fail to pay a tax debt, such as business or employment taxes. In the case of your business, this will include all business assets.

When a government files a lien, it has priority over all other debtors. The government isn’t collecting anything at this time. It is simply claiming the first spot in line for future collections.

Federal, state, and local governments can impose a tax lien. This article focuses on federal tax liens created by the IRS.

business tax lien definition

How a lien affects your business

A federal tax lien can have several effects on your business.

A tax lien attaches to your business assets, including property, vehicles, and accounts receivable. The lien also attaches to any assets you receive during the lien.

The IRS files the lien notice in public records where it can be viewed by creditors. The lien might affect your credit score and your ability to get credit.

If you file for bankruptcy for small business, the tax debt and lien may continue after the bankruptcy.

In some cases, the IRS will hold corporate officers and their spouses responsible for the unpaid taxes.

Tax liens vs. tax levies

A tax lien is different from a tax levy.

A tax lien secures the government’s interest in your assets. You do not lose assets from a lien.

A tax levy actually takes your business assets to pay your debts. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy your assets.

How tax liens work

If you don’t pay your taxes in full when you file the return, the IRS will send you a notice for the amount you owe. The IRS Notice of Tax Lien will explain the amount and demand you pay it.

If you fail to pay the debt in full within 10 days after the IRS sends the first notice, a tax lien automatically arises. The IRS may file a Notice of Federal Tax Lien in public records, which lets other creditors and governments see it.

The lien will remain in effect until you pay your debt.

How to avoid a lien

The best way to avoid a tax lien is to file and pay your business and employment taxes. If you pay your taxes, the IRS doesn’t have any reason to impose a lien.

Do what you can to pay your tax bills on time. Reduce business expenses if necessary. If you notice that your business has cash flow problems, plan to make sure you can make your deposits on time.

If you absolutely can’t pay your taxes, file your returns and contact the IRS as soon as possible to start payment negotiations. You might qualify for a different payment option, including:

  • Monthly installments
  • An offer in compromise
  • A temporary collection delay

If the IRS does send you payment notices, don’t ignore them. Follow any instructions the IRS gives you.

How to get rid of a lien

A tax lien is only lifted after all debts, fees, and interest are paid. Until then, your current and future assets are at risk.

Do not ignore IRS notices. Promptly address them.

After you pay your debt in full, the IRS releases your lien within 30 days.

You might want to get help from an accountant. The accountant can help you sort out your business’s finances and make a plan for paying the debt. You might also want to hire a lawyer who is familiar with tax law and liens.

You have three options for reducing the impact of the lien (discharge of property, subordination, and withdrawal), which are outlined by the IRS. These options only reduce the impact; they don’t get rid of the lien or the amount you owe.

Are you worried about keeping track of taxes and other business expenses? Try our small business accounting software for free.

This article is updated from its original publication date of 10/20/2015.

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