Individuals feel a tax lien at the closing table. Businesses feel it every week. The bank wants to know why there is a federal tax lien in the Secretary of State's records. The factor that buys your receivables wants to talk about priority. A buyer for a piece of equipment wants a clean title. Suddenly the tax problem is an operations problem.
Understanding how the lien works in a business setting lets you get ahead of those conversations.
What the lien reaches
The IRS's lien page puts it in one sentence: "The lien attaches to all business property and to all rights to business property, including accounts receivable." That includes equipment, vehicles, inventory, bank accounts, contracts, receivables, and the rights to payments customers owe. Under section 6321 and Glass City Bank v. United States, 326 U.S. 265 (1945), the lien also reaches property acquired later, while the lien lasts. A receivable that comes into existence next month is covered.
Whose debt is it?
The lien follows the taxpayer, so the first question is who owes. That depends on the entity and the tax.
- Sole proprietor. The business is you. A lien for your individual income tax or for the business's employment taxes reaches your business assets and your personal assets alike.
- Corporation. A corporation's tax debt creates a lien on the corporation's property, not the shareholders' personal property. Owners can become personally liable through separate assessments, such as the Trust Fund Recovery Penalty for unpaid withheld taxes, which then create a separate lien against that person.
- LLC. It depends on how the LLC is classified and which tax is involved. IRM 5.17.2.3 notes that for employment tax and certain excise tax purposes, a single-owner unincorporated business entity is classified as a corporation under Treas. Reg. 301.7701-2(c)(2)(iv) and (v). IRM 5.12.9.3.1.1 says only the name of the liable taxpayer should appear on a notice, and a notice filed in the name of an entity that is not the taxpayer must be amended or withdrawn.
Get this right early. A notice in the wrong name is a ground for withdrawal or amendment. A notice in the right name, against the right entity, is not.
Where the notice is filed
For personal property, section 6323(f)(2) treats a corporation or partnership as residing where its principal executive office is located. IRM 5.17.2 says that in states that adopted the Revised Uniform Federal Tax Lien Registration Act, notices against corporate and partnership personal property go to the Secretary of State. Real estate notices go where the land is. That is why a business may have one notice at the state level and others in county land records. See where the IRS files tax lien notices.
The financing problem
Lenders care about priority. A filed notice puts the IRS ahead of later security interests, with limited exceptions.
- Existing lines of credit. Sections 6323(c) and (d) protect certain advances under written agreements entered into before the filing, generally for 45 days or until the lender learns of the filing. See the 45-day rule for business lenders.
- New financing. A lender making a new loan after the filing will be behind the IRS unless something changes the order, such as a certificate of subordination under section 6325(d).
- Factoring and floor plans. IRM 5.12.2.4.3 recognizes that businesses which factor receivables, operate on a floor plan, or would lose revolving receivables financing can be hurt by a filing, and lists those as examples where the IRS may defer filing with documentation and a reasonable resolution. IRM 5.12.10 has specific procedures for subordination to factoring agreements.
Selling inventory and assets
Day-to-day retail sales are protected. Section 6323(b)(3) says the lien is not valid against a purchaser of tangible personal property bought at retail in the ordinary course of the seller's business, unless the buyer intends the purchase to hinder, evade or defeat tax collection, or knows it will. Your customers do not take your tax problem home with their purchases.
Sales outside the ordinary course are different. Selling a piece of equipment, a vehicle, or the business itself will run into the lien. The buyer will want the asset discharged from the lien, and the proceeds are your property, subject to the lien. Planning that transaction with the IRS in advance is far better than discovering the issue at closing.
Customers and receivables
Because the lien attaches to receivables, the IRS's claim already sits on money your customers owe you. A lien by itself does not redirect payments; that takes a levy served on the customer. But a lien notice tells the world the IRS has a claim, and sophisticated customers and factors notice.
What the IRS weighs when you ask for relief
The IRS's manual is practical about businesses. When considering whether withdrawal will facilitate collection, IRM 5.12.9.3.3 asks whether the amount realizable will increase, whether conditions would have supported not filing in the first place, whether withdrawal will help the taxpayer obtain credit that improves its ability to pay, whether the business is "pyramiding" liabilities, and whether all required returns are filed. It says a notice should not be withdrawn if the taxpayer is not in compliance with filing and deposit requirements.
For a business, that last point is decisive. Current payroll deposits and returns come first. An operating business that is still falling behind on current employment taxes will not get relief on old ones.
The direct debit installment agreement withdrawal program is narrower for businesses than for individuals. IRM 5.12.9.3.2.1 limits operating businesses to income tax liabilities; out-of-business entities qualify for all types. Other businesses look to the facilitate-collection or best-interests grounds. See the four grounds for lien withdrawal.
Closing or selling the business
When a business winds down, the lien does not wind down with it. The assets remain subject to the lien until the debt is paid, the assets are discharged, or the collection period expires. A few points are worth knowing:
- IRM 5.12.2.4.2 says the IRS generally should not file a notice against a defunct corporation or LLC whose assets have already been liquidated, or one that went through a liquidating bankruptcy or receivership. That is about future filings, not existing ones.
- For an out-of-business entity, the direct debit withdrawal program in IRM 5.12.9.3.2.1 covers all types of tax, not just income tax.
- A sale of the whole business is a sale outside the ordinary course. Expect the buyer's lender and title company to require that the IRS lien be paid, discharged from the sold assets, or otherwise resolved at closing.
Moving assets is not a plan
It is tempting to form a new company and move the equipment, the customers and the bank account. IRM 5.17.2.5.7 lists the factors the IRS uses to treat a new entity as an alter ego, including commingling, control by the taxpayer, undercapitalization and failure to observe formalities. An alter ego notice is not limited to specific property. See nominee and alter ego liens.
A business owner's checklist
- Identify which entity owes, for which taxes and periods.
- Get current on deposits and filings before asking for anything.
- Find every recorded notice: state filing office and counties with real estate.
- Review loan, factoring and supplier agreements for lien-triggered clauses.
- If a filing has not happened yet, document any hamper-collection facts for the revenue officer.
- If a filing has happened, decide between withdrawal, subordination, discharge for a specific sale, or a CDP hearing if the deadline is still open.
For a business, the lien is a cash flow problem dressed up as a legal one. Solve both.