If you’re anything like millions of Americans, then you probably shudder at the thought of receiving any type of notice from the Internal Revenue Service. If you’re a business owner facing a federal tax lien, your anxiety might be heightened at the thought of losing your business, being fined, or in the very worst case, being imprisoned.
Not to fear, the chances of your tax lien moving into criminal territory is slim to none in most cases. The good news is that having a federal tax lien against your business assets is totally separate from criminal prosecution. The even better news is that a tax lien rarely turns into a matter of criminal prosecution.
If you’re concerned about having a tax lien and its consequences, it might help to understand more about what it actually is and how it could affect your business operations.
According to the IRS website definition of a lien, “A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt.” The site goes on to clarify that “a federal tax lien exists after the IRS assesses your [tax] liability and sends you a bill that explains how much you owe (Notice and Demand for Payment).”
To put it all in perspective, a lien simply means that the IRS has priority over all of your debtors should your business become insolvent for any reason. A lien is simply the first step in the IRS’s process for collect what’s owed to the agency.
Receiving notice of a lien can be scary, but a business owner usually has plenty of time and remedial options for discharging it.
If your failure to file or pay is related to your business, then the IRS will place a lien on your business assets. However, it is still possible that the IRS could hold corporate officers (and, in some cases, their spouses) responsible for unpaid taxes.
According to small business tax expert Dan Pilla of Tax Expert Online, 35 million penalties are assessed against taxpayers each year. About two-thirds of those assessments are against businesses. The majority of those penalties are for neglecting to file and pay payroll tax filings.
Pilla further explains that many new business owners (the self-employed included) are unaware of the IRS requirements to file and pay payroll taxes. The government takes these taxes very seriously because they are to be held in “trust” on behalf of an employee to cover things like income tax, social security taxes, Medicare taxes, etc.
The businesses that are aware of their payroll tax obligations may run into situations where they are strapped for cash. In this case, they illegally operate on net payroll in order to “save” money.
For example, an employer may owe a paycheck of $1,000 to an employee, but the gross payroll burden comes in at $1,250. The employer’s tax liability is $250 while they are expected to deposit another $250 with the IRS on behalf of the employee for trust fund taxes.
Operating on net payroll, the employer may only pay the employee’s net income of $750. Now, the business owes the IRS $500, even though the employee received a full paycheck.
Now, imagine this same scenario times hundreds of employees and that months or years have gone by without the business filing quarterly returns or paying taxes owed during these quarters. This can add up to serious tax problems for a business.
In either case, the problems begin when the business owner does not file their returns. Pilla warns business owners, “Even if you don’t have the money to pay, still file your returns.”
If you are in a situation where owing the IRS is inevitable, you don’t want them to add failure to file to failure to pay penalties.
Again, a tax lien does not spontaneously transform into a crime. According to Allie Petrova, the managing partner of Petrova Law, “For a civil federal tax matter to go criminal, the IRS must refer the case internally—to its Criminal Investigation division.” This type of escalation is a function of suspicion. If the IRS believes a business owner intentionally evaded taxes through fraudulent activities, the criminal investigation begins.
Neglecting to pay taxes is totally separate from criminal intent. Being charged with a tax crime all comes down to one thing: intention.
A person or business can face criminal prosecution only if the IRS can prove, beyond a reasonable doubt, that failure to pay or file tax returns was the result of a deliberate act to violate the IRS tax code.
Examples of fraudulent activity include:
In order for the IRS to prove that you’ve committed a tax crime, they’ll have to prove that you knowingly attempted to defraud them. Though many businesses are familiar with the rules around good tax practices, some may be engaging in these practices unintentionally.
Though intention is the delineator here, it’s best to correct any practices that could be mistaken for criminal intent down the line.
Pilla advises that business owners use all the tools, options, and recourse available as soon as they are having financial troubles.
As a business owner, you want to be proactive at the first sign of financial trouble. If you notice you are having cash flow issues, make a plan to keep your quarterly filings and deposits on time. IRS auditors will look at your financial records to determine if you paid other obligations while neglecting to pay your tax bill.
Cutting expenses or suspending operations would be a difficult thing to do. However, these actions could save you thousands of dollars in IRS penalties and fees down the line.
If, after every conceivable effort, you still have difficulty paying taxes, file your returns anyway. If your payments won’t accompany these returns, start communication with the IRS right away to negotiate payment plans.
If you’ve passed this point and have been informed of a lien placed against your business assets, you’ve still got an appeal right. According to the IRS Office of Appeals website, they have helped over 100,000 taxpayers resolve their tax disputes without going to tax court. If things go south here, you could appeal at the U.S. Tax Court level.
Any tax lien on your business assets should be addressed promptly. If not, expect the inevitable: levies, seizure, and selling of assets. But this only happens if you don’t pay or make arrangements to pay your tax debt.
You should also know that if other creditors get wind of the lien, it could signal trouble, causing them to call in other debts or cease doing business with you. Suffice to say, you don’t want this issue looming over your head for too long.
The easiest way to rid your business of a lien is to pay your tax obligation in full. If that is not possible, there are other paths to discharging a lien outlined on the IRS website. Even if you don’t have the money owed right away, there are options to handle your tax issues and remove your lien.
The key all of this is to remain responsive and communicate with the IRS continually. One of the biggest mistakes that small business owners make is ignoring IRS notices and not cooperating with IRS representatives. You also want to retain counsel familiar with tax law, should your case end up in court. Before that, work with a CPA or other tax expert to deal with your business tax lien.