Navigating customer tax liens

When deep diving into a customer’s finances, the last thing a credit manager wants to see is a tax lien. While the first instinct may be to tighten that customer’s terms, more research needs to be done into the lien before credit managers can know the exact implications for their ongoing relationship with their customer.

Why it matters: A tax lien is a government’s legal claim against a business when it fails to pay a tax debt. Whether it’s imposed by a state or federal government, a tax lien means that the government has the first legal claim to an indebted company’s property and the right to collect payment before other creditors. When imposed, businesses often see lower borrowing capacity, reduced access to working capital and an overall decrease in company valuation.

“It’s never good for a business,” said Ken Zanolini, A/R credit manager for Dufrene Building Materials (Luling, LA). “It’s a public record and a liability, so it reduces the equity position of the owners. Also, the government can garnish payments and seize assets when there is a tax lien in place. Generally, if your customer has one, you want to make sure you have a payment arrangement with them to make sure that even if they are experiencing cash flow issues, your company is protected.”

When an unresolved tax lien is attached to the customer, it means that payments to the creditor will not be the top priority until tax payments have been made. “As a general rule of thumb, when a customer is under financial stress, unsecured creditors are often paid last,” said Krissy Aeschbacher, credit analyst for Maverik Country Stores (Salt Lake City, UT). “Tax liens carry legal consequences and typically take priority over other obligations. So, if a lien is unpaid, the customer is more likely to prioritize resolving that over paying trade creditors, which can lead to delays.”

To get rid of a tax lien, a business must pay the tax in full. With federal tax liens, the IRS will release the lien within 30 days of payment, so it may still appear on a credit report even after it’s been resolved. “Credit managers have to do their due diligence,” said Tomane Boone-Harris, accounts receivable manager for Oticon Inc. (Somerset, NJ). “So, the first step when you see a tax lien is to dig into public records from the state databases and see if you can find the real status of it.”

For some businesses, tax liens are a sign that the business is under financial stress, prompting credit managers to pay close attention to the customer moving forward. “It can signal financial strain, particularly if the customer is unable to resolve it or provide additional information,” said Aeschbacher. “It may impact the terms a creditor is willing to extend—or whether they move forward at all. In more severe situations, if the business is forced to close, outstanding debts may not be paid in full, if at all.”

When customers apply for credit with an unresolved tax lien, it can be risky for credit managers to bring on the customer. “Within our underwriting practices, if a tax lien is present, unpaid and the customer cannot provide proof of resolution, the application is declined—regardless of other creditworthiness metrics,” Aeschbacher said.

As with many issues in business credit, the easiest way to get to the bottom of a customer’s tax woes is to reach out to them directly to have a conversation on the status of the lien and their plans to address it moving forward. “It’s important to recognize that tax liens are sometimes reported inaccurately or not updated. By asking your customer about it, you’re not just protecting your company—you’re also giving them the opportunity to correct or resolve an issue they may not even be aware of,” Aeschbacher said. “Credit conversations can be difficult, but when approached as a partnership or coaching moment, they tend to be much more productive—and ultimately benefit both parties.”

While the conversation may be tense, it is important that credit managers reach out to make sure their customer is dealing with the matter. “Make sure your customer is dealing with it,” said Zanolini. “Always talk to your customer—open communication is really key in these situations. Find out what is going on; often the customer will be willing to work with you.”

Bottom line: Seeing a tax lien attached to a customer does not mean the end of your relationship with that customer. Instead, taking the steps to determine the status of the lien and your customer’s plan to settle the matter will help credit managers find the best path forward that protects their company’s interests without hindering sales.