What are Tax Liens and What Do They Mean for Small Businesses?
The IRS is a government agency that deserves respect. History recounts that dodged taxes landed Al Capone in prison and not his other heinous crimes. In fiction, heroes and villains quip that they’d rather face violent vigilantes and meteors rather than face an audit. We pay our taxes for a reason: to avoid that dreaded letter in the mail.
Sometimes, however, mistakes happen. We miss deadlines in the spring or relevant correspondence. The IRS at the moment is short-staffed and overworked, but the agents remain on the ball for the most part. That is why you must pay attention regarding tax liens.
What Is A Tax Lien?
A tax lien is a notice that the government can claim your assets. These include property you own, finances, inventory, and equipment. If your business is a sole proprietorship or a partnership, then whoever owns the business will find their assets forfeited. In the case of an LLC, only the business assets are affected.
Why Do Businesses Receive Tax Liens?
Businesses will receive tax liens if they fail to pay their taxes, and don’t follow up with the IRS on a payment plan or late fees. It’s more of a last resort on the IRS’s part. That means you can take steps to prevent receiving one, as we will discuss.
There may be many reasons why you are late on taxes. Maybe the payment isn’t there, due to emergencies or slow profits. Or you have switched from paying annually to quarterly, and thus the codes have become more complicated. In any case, you need to act, and fast!
Steps Leading Up To The Lien Notice
We must note that the IRS doesn’t just issue a lien at once. They usually provide some warning, so that you can still prevent a lien from happening.
First, you get a notice and demand for payment if you miss the deadline. If you receive this, you will also see any penalties or interest in addition to the money due. You can still prevent a lien if you pay this amount quickly.
Next, you and the IRS enter a period of negotiating payment. The IRS will understand if you cannot pay the full amount at once, and you can ask for an installation plan.
If you don’t pay within 10 days of receiving the notice, the IRS will send the Notice of Tax Lien. After this, the IRS can seize your assets as it seems fit.
Consequences Of A Tax Lien
Tax liens will appear on your business credit score, which will, in turn, affect your ability to borrow against existing company assets. The lien also goes on public record, for anyone to see including investors or potential venture capitalists. Banks and other lenders can refuse you a loan if they see proof that you haven’t paid your taxes.
In the worst case, you can lose your personal or business assets. This includes retirement accounts, property, inventory, and other finances. You would rather avoid that because losing your house or a business building can worsen your quality of life.
Criminal prosecution can also occur, but it is less likely because the IRS must prove that you are falsifying information on purpose. Don’t hide your income or lie on tax returns.
How Does A Business Owner Resolve A Lien?
The simplest solution is to pay your overdue taxes and any fees. The IRS, after thirty days, will remove the lien and you merely have to remember next time to not get behind. If that’s not an option, you can negotiate to pay a smaller portion of the taxes due and go for a payment plan. If you do an installation plan, or the IRS improperly files a lien, you can ask them to withdraw it.
In the case of Subordination, if you are in debt you can request to pay other creditors first before paying the IRS. This way you can get financing to pay the full amount.
Stay in contact with the IRS, and watch out for scammers. The IRS will never call via phone, but they will send letters and electronic messages if you wish. Keep a record of all correspondence. State agencies may also issue a lien, and they have different policies, so read up on it.
Learn More from Success Tax
Success Tax wants to help you manage the finances of your small business without the headache. Our clients like how we apply our expertise to solve your problems.
Reach out to us today. We will help you manage any liens, and create a plan of prevention. Let’s get your taxes paid on time, so you can focus on the nuances of your business.