What Does an IRS Lien or Levy Mean for Your Business?

IRS levies and liens on businesses aren’t all that common and are typically resolved long before any property is seized. However, receiving a Collection Due Process (CDP) letter from the IRS is cause for concern and deserves your prompt attention. On this page, we’ll walk you through what IRS liens and levies are and how they work, plus cover some tax lien resolution solutions, including tax lien financing solutions that can help.

What’s the Difference Between an IRS Levy and an IRS Lien?

When IRS payment is not received in full, the agency can follow a few different avenues in an effort to get you to pay your tax arrears.

Collection Due Process Letter

Around 75,000 businesses receive IRS CDP letters each year, the?IRS ?reports. Generally speaking, no legal action has been taken against you or your business when the first letters are sent. Instead, they’re sent to inform you of your unpaid tax balance and to let you know what you can do to resolve the situation.

Even though the language used on CDP letters may seem frightening, this is your best opportunity to act. During this stage, you can contest the balance or often?negotiate a payment schedule with the IRS . Some businesses also take out loans to pay off tax debts at this stage to avoid paying fines or penalties and to get the balance paid off quickly.?

Tax Lien on Business

If you don’t respond to CDP letters, the IRS’s next step is typically to file a lien. This legal claim against your property is used to secure the tax debt. It means that the property cannot be sold or used as collateral. Liens against businesses usually span all assets, covering everything from your real estate to equipment and receivables.

You still have some negotiating power during this stage, but it’s tough to get tax lien loans because the IRS already has a claim to most types of collateral you would otherwise use to secure the debt. It’s worth noting, however, that the IRS removes liens once the balance is paid.

Tax Levy on Business

If you don’t respond to the letters or your IRS tax lien notification, the government may be able to seize your assets to satisfy your tax debts. The physical seizure of your property is referred to as a levy. The IRS must send you a “Final Notice of Intent to Levy and Notice of Your Right to A Hearing” 30 days beforehand.

You can still work things out with the IRS at this stage. In fact, you can even ask the IRS to release seized property before it’s sold, provided you can take care of your tax balance, per?IRS ?guidance. However, setting things right’s much more difficult if you reach the levy stage.

The Impact of a Levy or Lien Against a Business

Liens impact a business’ credit and access to funding, meaning it can be much more challenging to take out a loan to cover an unpaid tax balance or cope with working capital gaps. You may find that even vendors refuse to wait for payment too.

Because the IRS can levy most any business asset, the agency can conceivably drain your bank account or collect payments due to you before they reach you. This makes it incredibly difficult to anticipate cash flow and run a profitable business.

Additionally, IRS debts and liens are not cleared in bankruptcy. They’re distinct from any other debt or lien in this respect, which makes them very difficult to escape.

How to Address Tax Liens

If you’re worried about getting a tax lien or already have one, there are a few ways to address the situation.

1. Pay Taxes on Time and in Full

Sometimes businesses intentionally pay taxes late because other expenses take precedence, such as an emergency or payroll. If something like this prevented you from paying taxes on time, get processes in place to?manage working capital better .

2. Respond to the IRS Promptly

The IRS doesn’t really want to levy your assets. It just wants the money due. Respond promptly to IRS letters or bring on a tax expert, such as an accountant or attorney, right away if you don’t feel equipped to deal with the situation on your own. Again, you can contest the amount or make payment arrangements. Your best opportunity to do this before the IRS takes any legal action.

If you don’t qualify for a loan or don’t want to take on debt, invoice factoring may be an option. With?invoice factoring , your business sells its unpaid B2B invoices at a discount to a third party known as a factor or?factoring company . Your business gets upfront cash to pay off the tax debt before the IRS puts a lien on your assets and causes issues for your business. The balance is cleared when your client pays their invoice, so there’s no debt to pay back. This solution also works before you receive a CDP letter, so you can take a proactive solution and pay off your tax debt before the IRS gets involved. It’s ideal for businesses struggling to build good credit too, as approval largely depends on your clients’ credit rather than your business’.

3. Explore Tax Lien Financing

The primary reason bank loans and other funding options don’t work when you have an IRS lien is that the IRS already has a claim to your assets, which means you can’t use them as collateral. Therefore, getting funding before a lien is placed is generally best if you’re trying to pay off your tax balance with a loan.

It’s worth noting, however, that the IRS takes what’s known as “first position” in these situations. Another entity could, in theory, take second position. That means if an asset is liquidated, the IRS collects what its owed from the asset’s sale first. If anything is left after, the entity in second position collects what it can from the sale of the asset after. For instance, if you owe the IRS $25,000 and owe another creditor $5,000, and an asset levied is worth $27,000, the IRS gets the full $25,000 owed, and the second creditor gets $2,000 of the $5,000 owed.

Most lenders will not take second position because it’s risky for them. However, the IRS sometimes does so if it increases the odds of being paid in full. Most loans don’t accomplish this task. Factoring differs because it provides upfront cash as you complete work or deliver goods. In this respect, it allows you to take on work you might not otherwise be able to afford to accept and expand your business. Once you find a factoring company you want to work with and have a tentative agreement in place, you’ll obtain IRS subordination of the lien. In other words, the IRS agrees to take second position, and the factoring company takes first. Although it may sound complicated, an experienced factoring company can walk you through the process and help you get established.

Secure Your Tax Lien Financing Through Viva

Whether you’re trying to avoid a tax lien or already have one and are trying to work out a payment plan with the IRS, Viva can help. Contact us for a?complimentary rate quote .

original article: What Does an IRS Lien or Levy Mean for Your Business?