Tax liens — particularly federal IRS liens but also state and local — are among the most damaging negatives on an MCA application. Many funders auto-decline merchants with open liens; the rest charge steep premiums and require lien-resolution paperwork. Strategic lien resolution can restore eligibility in 60–90 days.
What is a tax lien.
A tax lien is a legal claim by a taxing authority (IRS, state Dept. of Revenue, local) against the merchant's assets for unpaid taxes. It's filed publicly (Notice of Federal Tax Lien — NFTL — at the county recorder for federal), making it visible to creditors and credit bureaus.
Why liens kill MCA approval.
- Priority claim: a tax lien takes priority over most other creditors. If the merchant defaults on the MCA, the IRS claim is paid before the funder.
- Bank levy risk: the IRS can levy bank accounts, intercepting MCA debits.
- Asset seizure risk: the IRS can seize accounts receivable, equipment, vehicles — collateral the funder might otherwise rely on.
- Credibility signal: open liens signal financial distress.
Most A-paper and B-paper MCA funders auto-decline open liens above $10,000. C-paper and D-paper funders may approve at steep factor rates (1.45–1.55) with restrictive terms.
Types of tax liens.
- Federal IRS lien (Notice of Federal Tax Lien): filed at county for federal tax debt.
- State tax lien: filed for state income, sales, or franchise tax debt.
- Payroll tax lien: IRS or state for unpaid Form 941 / state unemployment / state withholding.
- Property tax lien: filed by local county for unpaid real estate taxes.
Payroll tax liens are particularly serious because the IRS treats unpaid payroll taxes as theft (Trust Fund Recovery Penalty); they can pierce the LLC veil and pursue owners personally.
Lien resolution options.
Option 1: Pay in full.
- Fastest path. Lien is released within 30 days of payment.
- Often not feasible for liens of $20K+.
- If you have cash (or can get a non-MCA loan to pay it), this is cleanest.
Option 2: Installment agreement.
- IRS allows installment agreements for debts up to $50K (streamlined) or higher (with documentation).
- During the agreement, the lien remains but the IRS will not actively enforce.
- Some MCA funders will fund merchants with active IRS installment agreements (typically B-paper to C-paper); they want to see at least 3 months of on-time payments.
Option 3: Lien subordination.
- IRS Form 14134 — request that the lien be subordinated to the new MCA.
- IRS may grant if it determines subordination helps tax collection (e.g., MCA funds enable the business to keep operating and pay taxes).
- Process takes 30–45 days.
- Funders strongly prefer subordination to outright lien acceptance.
Option 4: Lien withdrawal.
- IRS Form 12277 — request to withdraw the lien. - Granted if: - Lien was filed prematurely or in error. - Withdrawal will facilitate collection (e.g., merchant is in DDIA — direct debit installment agreement — and the lien is hindering business operations). - Withdrawal removes the public filing; lien-based credit-bureau marker disappears. - Most powerful option but harder to obtain.
Option 5: Offer in Compromise.
- Settle the tax debt for less than full amount.
- Requires demonstrated inability to pay full amount.
- Takes 6–24 months; not a fast solution.
Option 6: Fresh Start Initiative (IRS).
- IRS program that allows lien withdrawal once balance < $25,000 and merchant enters DDIA (direct debit installment).
- Often the fastest path for liens under $25K — pay down to threshold via DDIA, then request withdrawal.
State tax lien resolution.
Varies by state. Common options: - Installment agreement (most states). - Offer in compromise (some states). - Lien withdrawal (rarer than federal). - Penalty abatement (occasional).
Consult a state-specific tax pro or enrolled agent.
60–90 day resolution timeline for MCA funding.
For a merchant with a $30K federal tax lien who wants MCA funding:
- Day 1–7: pull IRS transcripts, confirm balance.
- Day 7–14: file installment agreement (online at IRS.gov for balances ≤ $50K).
- Day 14–30: make first installment payment. Set up direct debit (DDIA).
- Day 30–90: pay down balance. Once under $25K, file Form 12277 for lien withdrawal under Fresh Start.
- Day 90+: lien withdrawn or significantly paid down; apply for MCA.
Funders want to see: - Lien withdrawn (best), OR - Active DDIA with 3+ months of on-time payments, OR - Lien subordination granted in favor of the new MCA.
Documentation to provide funders.
- IRS transcript showing current balance and payment status.
- Installment agreement letter from IRS.
- Form 12277 / 14134 (withdrawal / subordination) if applicable.
- Bank statements showing IRS direct-debit payments hitting on time.
- Cover letter explaining lien origin (often: COVID-period payroll tax deferral, one-time large tax bill, sale of property triggering capital gains).
Funders that work with active liens.
Some C/D-paper MCA funders specialize in merchants with tax issues: - Higher factor rates (1.45–1.55). - Often shorter terms (3–6 months). - May require lien subordination. - Examples: certain niche funders, broker programs.
These are expensive but feasible for merchants who genuinely can't wait for resolution.
Cost of NOT resolving.
- MCA pricing degraded by 0.10–0.20 factor (e.g., $50K advance at 1.50 vs. 1.30 = $10K extra cost).
- Loss of access to many funders.
- Personal credit damage (federal tax liens stopped reporting to credit bureaus in 2018 but state liens still do in many states).
- IRS enforcement actions (levy, seizure).
Professional help.
- Enrolled Agent (EA): licensed to represent before IRS; typical cost $1,500–$5,000 for installment / subordination / withdrawal work.
- Tax attorney: for complex cases or Offer in Compromise; $5,000–$25,000.
- CPA with tax-resolution practice: middle ground.
For most MCA-applicable lien situations (installment agreement + Fresh Start withdrawal), an EA is sufficient and cost-effective.
Payroll tax lien — special urgency.
Unpaid payroll taxes trigger: - Trust Fund Recovery Penalty (TFRP) — personal liability for owners. - IRS revenue officer assignment (more aggressive than collection bureau). - Lien filing within 90 days. - Bank levy and asset seizure possible.
Resolution requires immediate engagement with an EA or tax attorney. Don't ignore — payroll tax issues compound fast.
Common pitfalls.
- Ignoring the lien hoping it goes away.
- Paying down without filing for withdrawal (lien remains on record).
- Stacking MCAs to pay down liens (creates death spiral).
- Lying on MCA application about lien status (most funders pull public records).
- Choosing the wrong resolution option (e.g., Offer in Compromise when installment + withdrawal would be faster).
- Failing to subordinate when funder requires it.
Takeaway. Open tax liens are among the most disqualifying negatives on MCA applications, but federal IRS liens are resolvable in 60–90 days via installment agreement + Fresh Start withdrawal, and state liens have similar paths; resolved liens restore access to A and B-paper pricing, while unresolved liens trap merchants in D-paper at 1.45+ factor rates — making lien resolution one of the highest-ROI pre-application activities for affected merchants.
Related terms
- MCA merchant judgment resolution funding impact — An unsatisfied civil judgment against a merchant typically prevents MCA approval or forces D-paper pricing. Resolution via payment, settlement, or vacating restores eligibility; satisfaction-of-judgment filing is the key proof.
- MCA merchant bankruptcy discharge funding impact — A recent bankruptcy discharge (Ch. 7 or 13) blocks most MCA funding for 12–24 months post-discharge. After that, some funders accept with D-paper to C-paper pricing as bank-statement history rebuilds.
- MCA merchant tax return prep (detailed) — Tax return prep for MCA applications means filing on time, reporting revenue that matches bank deposits, and showing positive (or controlled-negative) net income with reasonable owner compensation. Funders pull transcripts; misalignment kills files.
- MCA merchant credit score improvement strategy — Personal credit score improvement for MCA merchants focuses on credit utilization, on-time payments, removing collections, and not opening new accounts pre-application. A 60-point lift over 90 days routinely moves a file from C-paper to B-paper.
- Merchant cash advance (MCA) — A lump-sum advance against future revenue, repaid via fixed daily ACH or a percentage of card sales. Legally a sale of future receivables, not a loan.
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