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Bankruptcy may not solve all business tax problems

On Behalf of | Dec 20, 2022 | Business Bankruptcy |

Many business owners going through bankruptcy may also have outstanding taxes. While bankruptcy is often an effective way to make a business financially profitable again, bankruptcy won’t automatically release you from all financial obligations. Most unpaid taxes and any liens the IRS placed on your business’ assets will remain until the debt is paid off or a payment plan is set up with the IRS.

What is a federal tax lien?

A lien is a legal claim against a property, such as real estate or personal assets. A federal tax lien arises when the IRS assesses an unpaid tax debt with an official record. The IRS can then use this lien to secure payment from the taxpayer. A federal tax lien can be placed on business property and assets, such as company vehicles and accounts receivable.

Chapter 7 and Chapter 11 bankruptcy

While Chapter 7 allows certain debts to be discharged, it does not relieve you from paying your tax obligations. Chapter 11 is a reorganization of your finances where debts are paid over a period of time. This includes taxes owed to the IRS.

If you owe taxes for the current year or for the two years prior, they must still be paid even after bankruptcy. However, even if the taxes are eligible for discharge, any lien that was placed on your assets by the IRS will remain in place until the debt is fully paid.

How can a federal lien be removed?

Regardless of what kind of bankruptcy is filed, the only way to completely get rid of a lien is to pay it off. While settling a lien in full is the quickest method to resolve the debt, allocating a large lump sum of money is not usually possible for a business that is going through bankruptcy.

Alternatively, a lien can be resolved by setting up a payment plan with the IRS. Though the IRS will remove a lien with a payment plan in place, the debt remains, and if payments lapse, the lien will be reinstated. Another option is to sell property, whether to pay off debts or just as a personal financial choice. If the funds received from the sale exceed the debt owed, the IRS will only claim the amount due to settle the lien.