As business owners, we’re usually pretty good about knowing who we are dealing with. We may call up references, or do a little investigation into bankruptcy. We probably do a credit check, and ask for credit references. However, while all of those are a good start, they aren’t enough to give you the full picture about a potential customer, vendor or partner, and if you really want to know who you are dealing with, you probably still need to hire a professional to conduct due diligence investigative services.
There are many things they may investigate for you, but in this article, we’re going to take a closer look at what a tax lien search can tell you, and why it’s important.
What Is a Tax Lien?
If you’ve been in business for a while, then you’ve probably encountered the term “lien” at some point. Basically, in the simplest form, it’s a legal recourse that allows a creditor to take possession of property or goods, and to hold them until a debt is repaid.
Tax liens, as the name suggests, come into play when the debt is for unpaid taxes, and the creditor is the Federal Government. As you can imagine, that makes this a very binding sort of lien, and could mean very bad news for any company, including those who do business with the liened parties.
What Are the Risks?
If you choose to do business with a company who has been liened for tax, whether you’ve done a tax lien search or not, then there are very definite risks to your business.
Let’s imagine, for a moment, that you sell a large amount of product or equipment to a liened company. The government decides that they’ve defaulted on their taxes long enough, and opts to take legally allowed action, by seizing goods or property. Including the items that you had supplied, but that had not yet been paid for.
Depending on the final outcome of the lien and the company’s negotiations with government, you might never get those items back, and if that company then goes bankrupt, you might not get paid for them either. None of that is a great situation.
How to Protect Yourself
The best way to protect your business from the risks associated with tax liens is to include tax lien search in your due diligence. Before extending credit or increasing credit limits, and at regular intervals during your business relationship, it is prudent to make sure that your customers are in good standing with their taxes.
If you do find that a customer has a tax lien against them, it may be a good idea not to supply any more goods or services on credit, and to request that they provide proof when they have made good on their debts.
The truth is, due diligence investigation services are all designed to protect your business against unknown risks, and since this is a big one, it’s recommended that anyone who does extend credit to customers considers including it in their pre-approval checklist. It may seem invasive to investigate tax history, but the benefits certainly outweigh the risks.