Selling a DFW Business That Owes the IRS: Liens, Discharges, and Closing the Deal

A business owner behind on taxes reaches a point where selling looks like the cleanest way out. Sometimes it is. A buyer gets a going concern, the IRS gets paid from the proceeds, and the owner walks away. But the IRS does not step aside just because there is a signed letter of intent.

If the IRS has filed a notice of federal tax lien, every serious buyer will find it, and every title company and lender will insist it be dealt with at closing. The good news: the IRS has a defined process for letting a sale go through. The bad news: it takes time, and sellers who start it late lose deals.

What the lien attaches to

Under IRC 6321, the federal tax lien attaches to all property and rights to property of the taxpayer. Who the taxpayer is matters.

If the business is a corporation or LLC that owes its own taxes, such as payroll taxes, the lien attaches to the entity's assets: equipment, inventory, receivables, real estate, and goodwill. If the business is a sole proprietorship, or the owner personally owes income tax on pass-through profits, the lien attaches to the owner's assets, which include the owner's interest in the entity and anything the owner holds personally.

Under IRC 6323(a), the lien is not valid against a purchaser until a notice of federal tax lien is filed. Once it is filed in the right place, a buyer takes the assets subject to the lien. That is why buyers search the records. My guide on where the IRS files liens in Texas explains which records to search.

Asset sale or entity sale

In an asset sale, the buyer purchases specific assets from the business. The lien on those assets has to be released or discharged, or the buyer inherits it. The seller's liability for the tax stays with the seller.

In a sale of stock or LLC membership interests, the entity itself does not change hands; its owners do. The entity's tax debts stay with the entity, which now belongs to the buyer. Buyers who understand this either demand a price reduction, an escrow, and indemnities, or they refuse to buy the entity and insist on an asset sale.

Most small business sales in Texas are structured as asset sales for exactly this reason.

Getting the lien discharged: IRC 6325(b)

IRC 6325(b) lets the IRS issue a certificate of discharge that releases specific property from the lien so it can be sold free and clear. The application is Form 14135, and IRS Publication 783 explains the process. The most common ground for a business sale is 6325(b)(2)(A): the IRS receives an amount equal to the value of its interest in the property being sold.

The application needs the proposed sale details, the purchase agreement, an appraisal or other evidence of value, a list of liens with priority over the IRS, and a proposed closing statement. The IRS typically wants its share of the proceeds paid directly at closing.

Start early. The IRS's guidance asks for the application well before closing, and the processing time is real. A deal with a 30-day close and no discharge application filed is a deal at risk.

Allocating the purchase price

Asset sales require allocating the price among asset classes under IRC 1060, and both buyer and seller report that allocation on Form 8594. The allocation drives the seller's tax on the sale: ordinary income on inventory, receivables, and depreciation recapture; capital gain on goodwill.

When a seller already owes the IRS, the allocation has a second effect. It can create new tax on the sale itself. A seller who uses all the proceeds to pay old debt and forgets the tax on the gain will start the next IRS problem the day the old one ends. Run the numbers on the sale's tax before agreeing to the allocation, and set aside money for it.

Buyer and seller should report consistent allocations. Mismatched Forms 8594 invite questions for both sides.

Buyer due diligence

If you are buying a Texas business, assume nothing. Search for federal tax liens in the county records where the seller's real property sits and, for entity sellers, with the Texas Secretary of State. Ask the seller to sign Form 8821 authorizing you or your representative to receive the seller's IRS transcripts. Transcripts show assessed balances, unfiled returns, and pending issues that may not yet be on any public record.

Look at payroll specifically. Unpaid Form 941 liabilities are the most common hidden federal debt in small businesses. The IRS has legal theories, discussed in IRM 5.17.14, for pursuing a successor in some circumstances, and a buyer who continues the same business with the same owners can draw attention. Texas also has its own successor liability rules for state taxes administered by the Comptroller, a state-law question for a Texas professional who handles that area.

What happens to the remaining balance

If the sale proceeds pay the IRS in full, the lien is released under IRC 6325(a), generally within 30 days after the liability is satisfied. If they pay only part, the remaining balance stays with whoever owed it.

For an entity that sells all its assets and stops operating, a remaining balance often becomes uncollectible against the entity. But the IRS will look for other sources: the trust fund recovery penalty against responsible persons for unpaid payroll taxes, and transferee liability against anyone who received the proceeds.

That last point is critical. Do not distribute sale proceeds to owners while the entity owes the IRS. Distributions to owners of an insolvent company are textbook transferee and fraudulent transfer cases. Pay the IRS first, or get an agreement with the IRS about how the proceeds will be applied.

For an owner who personally owes, the sale is a chance to resolve the debt: pay it in full, or use the proceeds to fund an offer in compromise or a shorter installment agreement.

Selling a business with IRS debt is a sequencing problem. Discharge application first, closing second, distributions last. If you are thinking about a sale and the IRS is in the picture, call before you sign the letter of intent: 813-229-7100. The firm's tax lien page has more background.