How to Resolve a Business Tax Lien

on February 16, 2018

If your business is privately held, as most small businesses are, your business finances are generally hidden from sight. But there is a way other businesses can get an idea of how healthy your business is financially, and that’s by reviewing your business credit reports. Anyone can check the credit report of your business, so having a positive business credit history is an important part of your business reputation.

Besides falling behind on payments to lenders and vendors, there’s one item that can seriously hurt your business credit, and that’s a tax lien. Here’s how to spot and resolve this credit-score killer.

What Is a Tax Lien?

It doesn’t matter the reason you missed a tax payment — maybe you don’t understand your business’s tax obligations or your books are a plain old mess — if you or your business falls behind on its tax obligations, the IRS or your state taxing authority may “file” or “place” a tax lien, which essentially gives the government a legal claim against your property. When you owe tax debt to the federal government, for example, it may file a Notice of Federal Tax Lien. That item appears in the “public record” (court records), alerting others that it has an interest in the property of your business.

Credit reporting agencies — companies that compile business credit reports — often get information from courthouses and then include personal or business tax liens in credit reports. A tax lien is considered a significantly negative item and can make it difficult to get credit.

While the focus here is on business tax liens, it’s entirely possible a tax lien that originated from business activities can be filed against you personally. If you operate as a sole proprietor, for example, your business and personal finances are essentially one and the same, and you are personally responsible for paying taxes on the income generated from your business. (You can read more here about how to separate your business and personal finances to protect yourself.)

What Can You Do About It?

First, it’s essential that you take care of tax debt as soon as possible, as taxes and penalties may continue to accrue. In addition, governmental agencies often have significant collection powers.

While you should receive a notice of tax debt before the lien is filed, it is possible a notice could slip through the cracks if, for example, you’ve relocated or closed your business. It’s also possible for credit reports of businesses with similar names to get mixed up with one another, and that could result in a tax lien erroneously appearing on the credit report of your business.

Monitoring your business credit reports is crucial so you can quickly investigate and respond if you see one appear on your credit reports.

If you confirm that a tax lien has been filed against you personally or against your business, talk with your accounting professional immediately. You may have options that can help you put the debt behind you. Three to consider:

  1. Pay the tax debt. This is an obvious first choice, but it may require you to get creative in order to come up with the cash to be able to pay off the debt. You may be able to liquidate some assets or get financing to cover the amount owed, for example.
  2. Enter into a payment plan. You may be able to enter into an installment agreement to pay the tax debt over time. While it’s likely interest will be charged, it can often be less expensive to go this route than to borrow money from a lender.
  3. Negotiate a settlement. You may be able to use an Offer in Compromise to resolve the tax debt for less than you owe.

How Long Will It Remain?

There is no limit on the length of time business tax liens may be reported. Each commercial credit reporting agency has its own policy with regard to how long they may appear on reports, sometimes for more than 10 years.

Federal law limits how long tax liens may appear on personal credit reports, however. They may appear on credit reports for seven years if they have been paid, and indefinitely if they are unpaid. (In reality, though, credit reporting agencies often stop reporting them on personal credit reports once they are 7-10 years old).

Note that paying or resolving your tax debt doesn’t mean the tax lien is automatically removed from your credit reports. You may, however, be able to request the IRS withdraw the lien using IRS Form 12277. Your accounting professional can help you understand whether there is a basis for requesting the withdrawal. (You may even be able to request a withdrawal while you are paying the tax debt under an installment agreement.) If you are successful in obtaining a withdrawal, you can ask the IRS to provide updated information to credit reporting agencies or you can submit that information yourself to the credit reporting agencies, requesting the lien be removed from your credit reports.

State taxing authorities have their own policies. If a tax lien has been filed against you or your business by a state or local taxing authority, talk with your tax professional to understand your options.

One more tip: Many tax liens were recently removed from personal credit reports as part of a move by the major credit reporting agencies to ensure accuracy of reported credit data. . You may have lucked out, credit-wise, and find this has happened to you when you review your credit reports. Just remember the fact that a tax lien does not appear on your credit reports does not mean the debt doesn’t exist. You’ll still want to find a way to take care of this so you don’t end up owing even more due to interest and penalties.