Have you ever wondered what happens if you don’t pay your business taxes in full (and on time)? For starters, you will receive a Demand for Payment notice from the IRS. After receiving this, you have 10 days to either pay the tax debt in full (that includes any fees you’ve incurred), or make arrangements to pay it over time.
If not? The IRS files a Notice of Federal Tax Lien. This means that the government has first rights to your business property — meaning physical assets like buildings and equipment, financial assets like accounts receivable, and intellectual property — and can seize and sell it to pay off tax debts. If you do not pay your state taxes, you can also be subject to state tax liens. All in all, not paying your taxes is bad news bears.
So, why does a tax lien have such a negative impact on your business? To sum it up — all creditors will be able to see it.
If you are looking to get a business loan, lenders are going to pull your credit report, and when they pull your credit report, they are going to see that the government has a lien on your business. And, this lien will stay on your report until you pay off your tax debt, work out a payment plan with the government, or the 10-year statute of limitation on tax collection expires.
Most lenders care when there is any kind of lien on your business. Why? When someone else already has a lien on your business, this means that entity is in “first position” or will be the first one paid if you go bankrupt. If a lender takes “second position” to another lender or the government, that means the debt still owed to them will only start being paid once (and if) the entity in first position is completely paid back.
Not to mention, if you can’t pay your taxes, why would a lender think you’d pay back your debt to them? A tax lien is a giant red flag to creditors.
As you can see, having a tax lien on your business will make it extremely tough to find any type of business financing. If you have a tax lien on your business and you want to apply for a loan, you will want to take steps to get it removed before you start your application. Pay your debt in full or work out a payment plan with the government. Once that is settled, it will take about 30 days to get the lien off your report.
But, the IRS also has other options to reduce the impact of the lien if the above option isn’t possible:
- Discharge of Property. In some cases, the lien can be removed from a specific property. Interested? The IRS provides instructions here.
- Withdrawal. For those eligible, this withdrawal removes the public Notice of Federal Tax Lien, assuring the IRS isn’t competing with creditors for your property. Obviously, you are still liable for the debt. Want to apply for withdrawal? Start here.
- Subordination. If eligible, subordination allows other creditors to move ahead of the IRS. This is a great option if you are looking for a loan or mortgage. Begin here if you’re interested.
If you currently have a tax lien on your business, there are options. Take them seriously. Invest the time it takes to make it right. When you need credit in the future, you’ll appreciate that.
If you don’t have a tax lien on your business, make sure it stays that way. Always pay attention to notices from the IRS, and work to pay your taxes on time each and every year. As you can see, if it’s worth it if you ever want to take on outside financing to grow your business.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.