Take These Steps When the IRS Comes Calling With a Tax Lien

The government doesn’t mess around when you owe it money. Do what you can to get out in front of your tax debt.

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It’s right up there on the list of questions no business owner wants to have to deal with: What happens if my business gets slapped with a tax lien?

A tax lien is exactly what it sounds like — a claim upon your assets as a consequence of unpaid taxes. At the federal level, the IRS filed just over 470,000 tax liens in 2016. (You can learn a lot more about the IRS’s practices and policies on liens and levies at www.irs.gov.)

But the power to file a tax lien doesn’t stop there.

“You can assume that any taxing authority has a right to place a lien on your property if you have any unpaid taxes,” says Patricia Hintz, a tax lawyer for the business law firm Quarles & Brady in Milwaukee, Wisconsin.

Taxing bodies also can levy or seize property, giving them access to, among other things, your bank account and business assets (both real and personal property). Most use liens and levies in a two-pronged strategy.

In the case of cash property, the taxing body sends a levy notice to the bank where the taxpayer in arrears has an account. The typical levy is only good for a designated day, Hintz explains, so bank officials “have to turn over all the funds they are holding for that person on a particular day.” Taxing bodies employing the levy mechanism typically watch closely and submit the levy when they have good reason to believe there’s cash on hand.

An exception to the “one day at a time” practice is when the levy is attached to a person’s wages. That enables the government to pull what it’s owed out of your paycheck in regular installments until the outstanding debt, including interest and penalties, is satisfied.

Taxing authorities can also seize other types of property, but the procedures vary depending upon the type of property involved, Hintz says.

Hire a Lawyer

If you wind up with a tax lien on your business, you’re pretty close to stuck.

“It’s going to be a huge deal that any tax lawyer is going to have to go through a lot of trouble to get you out of,” Hintz says.

At that point, you have no right to appeal on the substance of the issue — for example, that the tax was wrongly calculated. You can only appeal on procedure — for instance, that your due process rights were ignored.

A lien on property you plan to sell will have to be satisfied and lifted before you can sell it, or else the lien holder gets the first cut of the sales proceeds. If you think a lien is coming, you’ll need to move quickly to sell before it’s actually filed.

Hintz’s advice on what to do if you actually get hit with a lien is short and not so sweet:

First, get a good lawyer.

“You need to find a lawyer who deals with this stuff routinely,” she says.

That attorney will have contacts with the taxing entity and the practical insight to know what kind of deal is actually possible. By then, an accountant alone won’t likely be able to help you out of the jam you’re in.

Second, make sure you’re current on all other tax years.

“If you’re going to work out a deal with any taxing authority, you’d better be clean as a choirboy with your current liabilities,” Hintz says.

Pay any other outstanding tax debt as fast as you possibly can.

Working Your Way Out

Some of what happens next depends on your long-term business prospects: Are you about to go out of business? Or are you fighting to remain a going concern?

“If your business has just gone down the tubes, most taxing authorities may have offers in compromise,” she says.

That’s the formal name for an agreement to settle your tax debt for some percentage on the dollar.

If you plan to keep operating, you can still set up an installment plan to pay off the debt plus interest, plus penalties. But don’t expect to get a discount then. And do figure you’ll get either a two-year or four-year window to get it paid off.

Your creditor will look at your financial records to see how much you’re generating in receipts, then set your installments accordingly. And by the way, as part of the procedure, you can expect to be told what your permitted living expenses budget will be during that period.

Preventive Measures

It’s always best to level with yourself and ensure a major problem like a tax lien doesn’t happen in the first place.

“Most of the time liens and levies do not pop up by surprise,” Hintz says. “You generally know when you haven’t been paying your taxes.”

Also, keep in mind there’s a big difference between taxing authorities and most private-sector creditors.

An unpaid credit card company or vendor will nag you repeatedly. They’re likely at some point to turn your outstanding bill over to a collection agency. Not to mention your workforce: “If you’re short of cash and don’t pay your employees, they’re going to quit,” Hintz says.

Taxing authorities might seem mild mannered by comparison. They won’t be breathing down your neck as the interest and penalties add up.

“They’re quiet creditors for a fairly long time,” Hintz says. “But they are very draconian creditors on the back end because they charge very high interest rates and high penalties for failure to pay. It might take over a year after the tax is due before the lien or levy pops up.”

Failing to file a federal return carries a 25 percent penalty. Some state and local taxing bodies follow that benchmark, while rates vary widely elsewhere. 

Yet if you pay attention, there really shouldn’t be any surprise.

“Liens and levies are pretty extreme measures,” Hintz says. “They are considered a taking of property, so they can’t be done without due process.”

So right there, you should get warning signs about what’s coming — and each of those is an opportunity to prevent the worst possible outcome.

Paying Attention

That points to the real long-term prevention strategy: If you’re strapped for cash, don’t just pay attention to the squeakiest wheels who will nag you incessantly. Just because the IRS or your county treasurer isn’t bugging you about that unpaid tax bill doesn’t mean you can simply put them off without consequence. And don’t fool yourself into thinking you’ll simply quietly catch up on those old tax bills later.

“You might have the best of intentions, but that doesn’t help with tax authorities,” Hintz says.

Call your accountant, “and face a reality check,” she says. You’ll get more options for an installment plan that you initiate before you’re hit with a lien or a levy.

Sometimes a business on the verge of being hit with that lien may file an offer in compromise. That will typically suspend the collection process, although the business filing will generally have to make a down payment on the debt.

In short, like so many other challenges in business, the best way to stop a bad outcome is to head it off at the earliest sign of trouble. After all, foresight in tough times may be uncomfortable. But isn’t it a lot better than hindsight full of regret?



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