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The Haul of Infamy: Resolve Tax Liens Before They Become a Small Business Nightmare

October 10, 2012

Every time I recall that aqua couch with the floral pattern, I shiver. It had once been in the neighbor’s den, comfortably accommodating a family of four, both kids with a bright future … the daughter, in fact, destined to be valedictorian at Wellesley College.

But that was several years after they moved away. Disgraced and demoralized. The outcome of a failed business venture in pharmaceutical manufacturing.

no small business with this dog, but a big headache with tax liens
Are the feds giving you a headache with their tax liens?

Even to this day, I can vividly remember in the last days of their domicile buying this aqua couch from among their tagged-for-quick-sale furniture, as they moved down to far more modest digs.

It was a lesson in business risk that I shall never forget. Selling off personal assets to meet small business debts, so they wouldn’t be hauled off by the feds.

The plain truth is that a tax lien allows the federal government to seize your property to pay off outstanding tax debt. That means they can get their clutches on your house, car, any investment or retirement accounts you possess, jewelry and other items of value.

Not only might you loose your “stuff”, as late night comics would say, but it will also affect your credit rating and your ability to obtain financing for your business.

Naturally, no one wants this to happen. And in many cases, it need not occur.

What we see more often than business failure, is that a small business is lax in paying taxes promptly and in full. If a firm doesn’t keep current with its tax obligations, it will receive a lien, meaning the IRS will demand payment.

A company must respond to each and every correspondence from the IRS. Don’t let a situation where the government has a claim on your assets (a lien) turn into a situation where they actually seize property (a levy).

Of course, consult legal counsel as it pertains to your particular business’s circumstances.

But in general, if you proactively make arrangements to pay your firm’s back taxes, you will be better off. You can avoid having your firm’s credit rating go south, along with a commensurate drop in your ability to gain financing for your business.

First step is to make payment arrangements with the Internal Revenue Service. Most likely you will have to “man up” and set up an installment plan to start paying back what you owe. This may involve taking out a bond and signing a guarantee of payment. Consult IRS Publication 1450 for information on how to have the lien released. A good 20,000-foot view of the process is here.

Second step is to pay the lien in full. You will need to communicate with an IRS agent in a direct and forthright manner in order to set this up. If you have liquid assets and property sufficient to cover the lien, then you will be able to maintain a better sense of normalcy in the conduct of your business. If you do not have enough liquid assets or physical property, you can pay part of the total due and take out a bond to pay the remainder.

The bond, then, also has to be repaid incrementally.

By contrast, dispute the tax lien if you think that the circumstances were in some way unlawful. For information on how to appeal an IRS tax lien, see IRS Publication 1660.

Third step is to chill. If your small business is really not a candidate for flogging, then celebrate! After all, we are not talking about businesses that are marked for infamy, i.e. the Enrons of the world. We are talking about moderate business difficulties–receiving a tax lien–that can be solved via forthright steps.

The government will release your tax lien within 30 days of your firm resolving the debt. Indeed, that is happy hour.

Photo courtesy of Creative Commons 2.0, Debbie C.

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