The Wall Street Journal
By: Marshall Eckblad
June 13, 2011
It's getting harder for small businesses to clean up overdue tax bills
During the financial crisis, hosts of small companies fell behind on their taxes for the first time, accountants and lawyers say. Their timing couldn't have been worse.
The Internal Revenue Service is in the midst of a long push to centralize and automate many collection policies, which means emphasizing liens and levies on taxpayers with bills outstanding. At the same time, banks are under intense pressure to tighten lending standards. So, it's becoming harder for small companies to land loans to pay off those festering tax bills.
For many small companies, the tax troubles began piling up a couple of years ago. Gary Britt, a tax lawyer and accountant based in Atlanta, lays out a common story among his clients.
Under the weight of the recession, revenue at many businesses fell sharply at the beginning of 2009, just as the final tax bills came due for 2008--a bumper year for many companies.
So, as small firms struggled to cover the previous year's tax bills, they began to fall behind on withholding taxes for the next tax year. "It continued to get worse into 2010," Mr. Britt says. "We had people who couldn't make their quarterly tax payments in 2009, and now they're really behind."
Increasingly, falling behind means facing a lien or levy. Over the past decade, the number of liens has soared nearly 500% to 1.1 million annually, according to Nina Olson, the IRS's in-house national taxpayer advocate. (That figure covers liens against all taxpayers.)
Before the economic crash, lenders say, it was common for businesses to refinance their overdue tax bills with a loan from the bank. Now, as regulators press lenders to raise their underwriting standards, banks and lenders say they simply can't make loans to businesses with deep tax troubles. And that's especially true in the case of liens.
"We cannot fund a business that has a tax lien because they're violating the law," says Alex Dang, a business development officer at Opportunity Fund, a small-business lender in San Jose, Calif.
Matt McLaughlin, a small-business lawyer at Zetley Law Offices in Milwaukee, has a landscaper client who fell behind on taxes during the recession and is now operating under a tax lien. The lien, which is registered on the client's credit report, will remain in place until the tax bill is paid off--years from now.
Because of the lien, the client can't qualify for loans and has been unable to recruit a new business partner.
Says Mr. McLaughlin: "I told him he'll have to run his business without financing for the next five years. That's his only option."
The Case Against Liens
Since last year, Ms. Olson, the taxpayer advocate, has been outspoken about the use of liens. Liens are counterproductive, she has argued before Congress, in part because they make it harder for taxpayers to survive and pay down back taxes over time.
Under pressure from Ms. Olson, the IRS in February loosened some lien-filing policies, though many of the changes won't affect mature small businesses. The agency is also working to make settlements more accessible and will in some cases modify liens to accommodate lender financing.
"The goal is to help individuals and small businesses meet their tax obligations without adding unnecessary burden to taxpayers," says IRS spokesman Anthony Burke.
Mr. Eckblad is a reporter for Dow Jones Newswires in Chicago. He can be reached at firstname.lastname@example.org.