Can You Get a Small-Business Loan With a Tax Lien?

Getting a small-business loan with a tax lien on your record is not easy. Some online lenders may still offer funding if your sales and credit are strong, but those are the exceptions and not the rule.

Your best course of action? Address the tax lien before applying for a business loan. You’ll have more loan options and be able to secure better rates and terms.

What is a tax lien?

A tax lien is a legal claim the government places on your property and financial assets if you don’t pay personal or business taxes, including payroll, income or property taxes. This gives the IRS first dibs on your wages, property and other current and future assets while the lien is active.

Liens don’t show up on your credit report, but they're public record, which lenders can access. Having a tax lien is a major red flag to lenders and will disqualify you from most small-business loans.

How do you get rid of a tax lien?

Tax liens are released within 30 days after you pay your balance in full, including interest and fees.

A release doesn’t automatically remove the lien from public record. For that, you’ll need to submit a “withdrawal” application. To qualify for a withdrawal, you need to:

• Be in compliance for all tax returns for the past three years.

• Be current on estimated tax payments and deposits.

You may also qualify for a repayment plan or other options that can lead to a lien withdrawal.

What happens if you don’t resolve a tax lien?

Ignoring a tax lien can lead to a tax levy, where the government seizes property and financial assets to pay off your tax debt.

How to get a business loan with a tax lien

Your loan options will be extremely limited with an active tax lien, but you can take steps to improve your odds of funding.

1. Verify the lien is accurate

Even the IRS makes mistakes, so it’s important to confirm the amount of the tax debt owed is correct. You can find out by reviewing past tax returns or hiring a tax professional for help.

You can also contact the IRS Centralized Lien Operation to verify a lien or search for liens online through the proper agency.

Suspect an error? Follow the instructions on your lien notice for how to dispute it. Act fast, though, as deadlines apply. The Taxpayer Advocate Service, an independent organization within the IRS, can also help.

2. Establish a repayment plan

Ideally, you’ll pay your tax debt in full to have the lien released and withdrawn. If that’s not possible, contact the IRS to set up a direct debit installment agreement. Once in place, the IRS may withdraw your lien if:

• You’ve made three consecutive direct debit payments.

• Your debt will be paid in full within 60 months or before the collection statute expires, per your installment agreement.

• Your tax debt is less than $25,000 when you request the withdrawal.

• You haven't defaulted on a current or past installment agreement.

You can also request an offer in compromise, which settles your outstanding tax debt for less than the full amount. It can be hard to qualify for, though, and it isn't an option if you’ve filed for bankruptcy or are behind on your tax returns.

3. Explore online lenders

Online business lenders tend to have more flexible requirements, and some may approve you even with a tax lien if the rest of your application is strong. It also helps to show you’re taking steps to resolve the lien.

If you're approved for an online small-business loan despite your tax lien, expect higher rates and less favorable terms. Once the lien is resolved and withdrawn, you can try to refinance for better rates.

Can you use a business loan to pay off a tax lien?

Yes, if you can qualify. A business loan may even be a better choice than applying for the IRS repayment plan if you owe $25,000 or less in back taxes. The IRS plan charges 7% interest, compounded daily, with terms up to 24 months. If you can get a business loan with better rates or terms, it may be a smart way to resolve a tax lien.