Yes, if the loan deals with the lien. A filed Notice of Federal Tax Lien attaches to everything the business owns and everything it acquires later, and it outranks any lender that files after it. So lenders generally need one of two things at closing: the lien paid from the loan proceeds, with the IRS releasing it, or a certificate of subordination from the IRS (applied for on Form 14134) putting the new lender first. An installment agreement in good standing helps the underwriting, but it does not remove the lien or its priority.
- What the lien reaches
- All of the business's property, including assets acquired after it was filed
- What lenders need
- Payoff from proceeds at closing, or an IRS certificate of subordination
- Subordination
- Form 14134, decided by the IRS, not the lender
- Discharge
- Form 14135, frees one specific asset, typically on a sale
- Withdrawal
- Form 12277, removes the public notice altogether
- Installment agreement
- Shows the debt is managed; does not change priority
Unfiled balance, installment agreement, filed lien: three different files
Owners use "tax lien" for several situations a lender treats very differently. The federal tax lien arises automatically once the IRS assesses a tax, sends a demand, and the balance goes unpaid. It exists whether or not anyone can see it. What changes the lending picture is the Notice of Federal Tax Lien, which the IRS files in the public records of the state or county. Once filed, it appears in every lien search, and it establishes the IRS's place in line against lenders and buyers who come later.
| Situation | What a lender sees | What the lender will usually need |
|---|---|---|
| Balance owed, no notice filed | Nothing in the lien search; the balance shows up in tax returns, IRS notices or the balance sheet | Disclosure, the IRS account transcript, and a plan: payoff at closing or a current installment agreement |
| Installment agreement, no notice filed | A managed liability with a fixed payment | The agreement and proof every payment is current; the payment counted in debt service |
| Notice of Federal Tax Lien filed | A lien with priority over any lender filing after it, on every asset | Payoff from proceeds with a release, or an IRS certificate of subordination before closing |
| Filed lien plus installment agreement | A managed liability that still primes the new lender | Both of the above: the agreement shows good faith, but the lien still has to be paid or subordinated |
An installment agreement is the most misunderstood of the four. It tells a lender the IRS has agreed to wait while the business pays, and that matters: collection action stops while the agreement is honored. But the IRS does not give up its filed lien because a payment plan exists. A new lender lending behind that lien is lending behind a creditor whose claim reaches the same receivables, equipment and bank accounts it would take as collateral.
Why the lien stops a secured loan
Lien priority between the IRS and a lender works largely on first in time. A bank whose security interest was perfected before the IRS filed its notice generally keeps its place on the collateral it already had. A lender that files after the notice stands behind the IRS on everything. There are narrow statutory protections for existing lending arrangements, but a new lender coming into a business with a filed notice has none of them. See federal tax liens for the short definition.
That priority is only part of the concern. A filed lien also tells an underwriter something about cash flow. Taxes go unpaid when the business was short, and the lender wants to know why it was short and whether it still is. A lien from a one-off event, such as a disputed assessment or a large year-end balance after an unusually good year, reads very differently from a lien that sits on top of unpaid payroll taxes and stacked cash advances. The first is a closing item. The second is a credit question.
An existing lender has its own reaction. Many loan agreements make a filed tax lien an event of default, whatever the payment record on the loan itself. An owner planning a refinance because a lien has appeared should expect the current bank to be reading the same lien search. See what to do when you breach a loan covenant.
A lender does not decide whether the IRS will subordinate. Only the IRS does, which is why the subordination application belongs at the start of a refinance, not the end.
The IRS tools that matter in a refinance
The IRS publishes four ways to change what a filed lien does. Each answers a different problem, and a refinance usually needs only one or two of them.
- Subordination (Form 14134). The IRS keeps its lien but agrees in a certificate that a specific lender's interest comes first. The IRS grants it when subordinating helps it get paid: when the IRS receives an amount equal to the interest it is subordinating, or when the new loan will improve the business's ability to pay the tax, for example by refinancing expensive debt into lower payments that leave room for the installment. The application needs the proposed loan terms, the collateral, and how proceeds will be used, so it cannot be filed until the new lender has at least a term sheet.
- Discharge (Form 14135). Removes the lien from one specific piece of property, most often so it can be sold or refinanced on its own. Useful when the business sells a building or a piece of equipment and the IRS takes its share of the proceeds. It does not help a lender that needs a lien on everything.
- Withdrawal (Form 12277). Removes the public notice as though it had never been filed. It is available in limited circumstances, including after the tax is paid and, in some cases, for taxpayers in a direct-debit installment agreement. A withdrawal after payment is worth requesting: a released lien still shows in the records as having existed; a withdrawn one does not.
- Release. Once the balance is paid in full, the IRS issues a certificate of release. In a refinance, the lender wires the payoff to the IRS at closing and the release follows. The lender will want the payoff figure from the IRS, good through the expected closing date, because interest and penalties keep accruing.
How lenders close with a lien in place
In practice, most refinances handle a federal tax lien one of two ways, and the lender's term sheet will say which.
Payoff from proceeds. The tax balance becomes a line in the sources and uses, the lender pays the IRS directly at closing, and the lender's lien takes first place once the release is recorded. This is the cleaner answer and the one most lenders prefer, because it removes the prior claim instead of managing it. The loan has to be large enough to carry the tax on top of whatever else it refinances, which means the business's cash flow has to support that larger balance. See how much debt a business can carry.
Subordination. When the tax is too large to pay off, or an installment agreement is working and paying it down, the lender may close behind a certificate of subordination instead. The lender's commitment will be conditioned on the certificate, and the underwriting will count the installment payment as debt service alongside the new loan. The IRS evaluates the application on its own schedule, which is why lenders that accept this route ask for the application to be filed as soon as terms are agreed.
Combinations are common: part of the proceeds pays down the tax, the rest of the balance runs on an installment agreement, and the IRS subordinates its remaining lien because the paydown and the lower payment both improve its position. That combination is also the easiest for the IRS to say yes to.
SBA loans, state liens and owners' personal liens
SBA loans. SBA lenders screen the business and its owners for delinquent federal debt, and a past-due balance with no agreement in place will stop an SBA loan. A balance under a current installment agreement is not treated as delinquent, but the lender will still want a filed lien paid or subordinated. SBA's rules also bar using loan proceeds to pay delinquent withholding taxes, sales taxes or other money held in trust, so where the lien is for payroll or sales tax, the payoff has to come from somewhere other than the SBA loan. A 7(a) refinance of other debt also has its own tests: the new payment has to be at least 10% lower, and the debt current for the last 12 months. See using a 7(a) loan to refinance existing debt.
State tax liens. States file their own liens for sales tax, withholding and income tax, with their own subordination and release procedures. Sales tax and withholding liens get the same scrutiny as federal payroll liens, because the business collected that money on the state's behalf.
An owner's personal lien. A federal tax lien against an owner personally attaches to the owner's property, including their ownership interest in the business and anything they pledge. Where that owner is also the personal guarantor, the lender will treat the personal lien as part of the credit, and may need it resolved before closing just as a business lien would be.
What to put in the file
A tax lien disclosed at the start is a closing item. Found by the lender's lien search halfway through, it becomes a question about everything else in the file. Alongside Transparent's standard checklist for the loan type (for a term loan: P&L, year-to-date P&L, balance sheet and debt schedule), bring:
- A copy of each Notice of Federal Tax Lien and any state lien.
- IRS account transcripts for each tax period owed, showing balance, penalties and interest.
- Any installment agreement, with the payment history.
- Proof that current returns are filed and current deposits are being made.
- A short explanation of how the balance arose and what has changed since.
- For an SBA loan, the SBA checklist adds business and personal tax returns for the last two to three years, which is where the lender will see the balance first.
Transparent puts the tax position on the debt schedule as a liability in its own right, shows the payoff or the subordination in the sources and uses, and lays out the cause in the underwriting memo, so each lender reads the lien as a known item with a plan. See what goes into the lender package.
Common questions
- Will any lender lend behind a federal tax lien without subordination?
- A few lenders that do not rely on the collateral may, but a secured lender generally will not accept second place to the IRS on every asset. Expect the term sheet to require a payoff at closing or a certificate of subordination.
- Does an installment agreement remove the tax lien?
- No. It pauses collection while payments are made, but a filed notice stays in place until the balance is paid, the lien is withdrawn, or the IRS subordinates it to a specific lender.
- What is the difference between a lien release and a withdrawal?
- A release says the lien no longer applies, usually because the tax is paid; the record that it was filed remains. A withdrawal removes the public notice as if it had never been filed. After paying, it is worth asking for both.
- Can the new loan pay the penalties and interest as well as the tax?
- Yes. The IRS payoff figure includes the tax, penalties and interest to a stated date, and the lender pays that figure at closing. The loan simply has to be sized to carry it.
- Who applies for the certificate of subordination, the business or the lender?
- The taxpayer applies, but the application relies on the new lender's terms and documents, so in practice the business and the lender prepare it together once terms are agreed.