MCA and Tax Liens: How to Fund Merchants With IRS or State Tax Debt in 2026

Tax liens are one of the most misunderstood deal-killers in the MCA space. Many brokers automatically pass on merchants with open IRS or state tax debt -- but that approach leaves real commission on the table. The reality is more nuanced: some funders will not touch a merchant with a tax lien, while others specialize in exactly these deals. Knowing the difference, and how to package these submissions, is a meaningful competitive edge for any broker.

This guide breaks down everything MCA brokers need to understand about tax liens -- what they are, how funders evaluate them, and how to position and place a deal when your merchant has outstanding tax debt. For a quick refresher on any terminology, see our MCA glossary.

What Is a Tax Lien?

A tax lien is a legal claim the government places against a business (or individual) for unpaid taxes. When the IRS or a state revenue department files a formal notice, that lien becomes a matter of public record -- and it becomes visible to any funder conducting due diligence on your merchant.

There are two main types brokers encounter:

• Federal tax liens -- Filed by the IRS via a Notice of Federal Tax Lien (NFTL), these appear in county clerk records and on business credit reports from Dun and Bradstreet, Experian Business, and LexisNexis. They attach to the business and, in many cases, to the owner personally.
• State tax liens -- Filed by the state department of revenue or taxation. These vary significantly by jurisdiction. States like California, New York, and Illinois file aggressively and at lower thresholds. Other states file less frequently or only for larger balances.

Unlike a UCC filing (which signals an active lender position), a tax lien signals something funders view as more serious: the government has a priority claim on the merchant's assets and future receivables. That priority status is the core of the underwriting concern.

Why Tax Liens Are a Red Flag for MCA Funders

MCA funders purchase a merchant's future receivables -- they are not traditional secured lenders. But tax liens create a specific problem: the IRS holds what is known as super-priority status over most other creditors. This means if a funded merchant defaults, the IRS collects before the MCA funder does.

For funders, this creates several specific concerns:

• Cash flow diversion risk -- The IRS can issue a levy and redirect the merchant's bank account funds directly to tax debt repayment. If a merchant is mid-advance and the IRS levies the account, the funder's retrieval stops immediately.
• Business stability signal -- An open tax lien often indicates cash flow problems that preceded the funding request. Funders assess whether the merchant has the revenue health to sustain repayment alongside a government creditor.
• Future levy threat -- Even if the IRS is not actively collecting, an unpaid lien means the threat of a levy is always present. Funders price this contingency into their decision.

That said, these risks are manageable -- and many funders have built underwriting frameworks specifically for lien deals. The key is matching the deal to the right funder. You can search our funder directory to identify which funders are flexible on tax lien situations.

Tax Lien vs. Tax Levy: A Critical Distinction

Many brokers use these terms interchangeably, but there is an important difference that determines whether a deal is fundable at all:

• A tax lien is a legal claim -- a notice that the government has a right to the merchant's property. It is a public record but does not by itself interrupt cash flows.
• A tax levy is active collection -- the IRS or state is actually seizing assets or redirecting bank funds right now.

A merchant with an open lien but no active levy is fundable by many MCA funders. A merchant with an active levy -- where the IRS is already pulling money from the business bank account -- is essentially unfundable until the levy is released. If your merchant mentions that the IRS is currently withdrawing money from their account each month, that is a levy situation, and you need to refer them to a tax resolution professional before pursuing MCA funding.

Which Funders Will Consider Tax Lien Deals?

The MCA market segments into roughly three categories on this issue:

Funders That Decline All Lien Deals

Many mainstream funders -- particularly those offering lower factor rates to higher-credit merchants -- simply decline any application with an open tax lien. These funders treat IRS super-priority risk as outside their acceptable risk profile. If you submit a lien deal to one of these funders, it will decline at underwriting regardless of how strong the revenue story is.

Funders That Evaluate Lien Deals Case by Case

A significant portion of the MCA market will consider lien deals if certain conditions are met. These funders typically require:

• An active IRS installment agreement or payment plan already in place
• A lien balance that is manageable relative to the merchant's monthly revenue
• No active levy or bank seizure currently in progress
• Bank statements showing no government collection activity withdrawals
• Strong, consistent monthly revenue that supports the requested advance

For these deals, the submission notes you write matter enormously. See our guide on MCA deal packaging and submission for best practices on building a compelling file.

Funders That Specialize in High-Risk and Lien Deals

Some funders actively serve the high-risk MCA segment, including merchants with open tax liens, prior defaults, and challenged credit profiles. These funders price accordingly -- expect higher factor rates and lower advance amounts -- but they represent a legitimate placement option for merchants who have been declined elsewhere. Create your broker account on MCA Directory to connect with ISO reps who work these deals regularly.

Key Factors Funders Weigh on Lien Deals

When a funder does consider a lien deal, these are the specific variables that move the needle:

Lien Age

A federal tax lien filed three years ago with a declining balance signals a different risk profile than a lien filed six months ago on a growing balance. Older liens with evidence of partial payment indicate the merchant is managing the debt. Newer liens raise questions about the root cause of the tax problem and whether the situation is stabilizing or deteriorating.

Lien Balance vs. Monthly Revenue

Funders typically want the outstanding lien balance to be no more than two to three months of the merchant's average monthly revenue. A merchant generating $80,000 per month with a $50,000 tax lien is viewed very differently from one generating $30,000 per month with the same balance. The ratio matters more than the absolute dollar amount.

Active IRS Payment Plan

An installment agreement (IA) with the IRS is one of the most powerful positive signals in a lien deal submission. It demonstrates the merchant proactively engaged with the IRS, has a structured resolution plan, and is making regular payments. Funders who approve lien deals routinely require proof of an active IA as a condition of approval.

Bank Statement Evidence

Funders will scrutinize the merchant's bank statements for signs of IRS activity. Regular fixed debits labeled as IRS or US Treasury withdrawals confirm either a payment plan (neutral to positive) or a levy (deal-stopper). Clean bank statements showing no government collection activity, combined with an acknowledged lien and an active payment plan, actually tell a manageable story.

Business Tenure and Revenue Stability

Lien deals require strong fundamentals elsewhere. A merchant with three or more years in business and consistent or growing revenue is far more placeable than a newer business with erratic deposits. Funders are looking at the lien as a specific problem, not as evidence the business is failing, if everything else is solid.

How to Pre-Qualify a Merchant With a Tax Lien

Before submitting, run through this checklist with your merchant:

• Confirm lien type and balance -- Ask the merchant to pull their IRS account transcript or contact the IRS directly for a balance. For state liens, check the state revenue department's public records search.
• Determine lien age and filing date -- Get the exact date the lien was filed. Liens older than 12 months with a payment history are generally more fundable.
• Ask about payment plans -- Is there an active IRS installment agreement? If yes, get documentation of the agreement and the most recent payment confirmation.
• Check for levy activity -- Ask the merchant directly: is the IRS or state currently withdrawing money from the business bank account? Review the last three months of statements for any government collection debits.
• Calculate average monthly revenue -- Pull average monthly deposits from the last three to six bank statement months. The advance you request should be conservative relative to the lien balance.
• Check for existing MCA positions -- A merchant with a tax lien and multiple open MCA advances is a significantly harder placement. Review for MCA stacking risk before proceeding.

This upfront qualification work saves submission time and protects your relationship with underwriters. Submitting a lien deal without this groundwork is how brokers earn a reputation for wasting funders' time.

How to Package and Present a Tax Lien Deal

Presentation is everything on challenging submissions. A lien deal with clear, organized notes will outperform a clean deal submitted without context. Here is how to structure your submission notes:

Lead With the Lien -- Do Not Bury It

Do not attempt to minimize the tax lien or hope underwriters miss it. Every funder will find it within minutes of opening the file. Open your notes by acknowledging it directly: state the lien type, the balance owed, the filing date, and whether the merchant has an active installment agreement with scheduled monthly payments.

This signals that you have done your homework, the merchant is transparent, and there is a resolution path already in place. Proactive disclosure builds credibility with underwriters.

Explain the Root Cause

If you know why the merchant accumulated the tax debt, include a concise explanation. Common reasons funders find acceptable include: the merchant experienced COVID-related revenue disruption and deferred payroll taxes during 2020-2022, a prior bookkeeper failed to remit taxes, or a one-time revenue event created unexpected tax liability. Funders respond to a coherent narrative that distinguishes a specific, understandable problem from a pattern of financial mismanagement.

Highlight the Revenue Story

After addressing the lien, pivot immediately to why this merchant can service the advance. Lead with the key metrics from the bank statements: average monthly revenue, revenue trend over the past six months, number of daily or weekly deposits, and average daily balance. These numbers are the real story of repayment ability.

To model the right advance amount and factor rate for this merchant, use our underwriting calculator to build a deal that makes sense given both the lien balance and the monthly cash flow before you submit.

Request a Conservative Advance Amount

Lien deals should be sized conservatively. Requesting 50% of monthly revenue or less is typical for these placements. Funders who approve lien deals often cap their advance at a lower multiple than they would for a clean merchant. Coming in at a realistic number -- rather than pushing for maximum advance -- improves approval odds significantly and sets the merchant up for a successful repayment.

Pricing Expectations: Factor Rates and Holdback

Expect pricing to reflect the elevated risk. A merchant who would normally qualify for a 1.25 to 1.35 factor rate on a clean deal may see rates of 1.40 to 1.55 or higher on a lien deal, depending on the funder and the specifics of the lien situation. Holdback percentages may also be slightly higher, which shortens the effective term of the advance.

Prepare your merchant for this pricing reality before you submit. A merchant who is shocked by the terms after approval is more likely to back out, wasting everyone's time and damaging your funder relationship. Set expectations early: unresolved tax debt history carries a pricing premium, and that premium exists because funders are accepting real additional risk.

For a deeper breakdown of how MCA pricing is calculated and what drives rate variation across funders, see our factor rates explained guide.

Red Flags: When a Tax Lien Deal Is Not Placeable

Even experienced brokers need to decline deals. Here are the scenarios where a lien deal is unlikely to place with any funder:

• Active levy in progress -- If the IRS or state is actively withdrawing funds from the merchant's bank account, the deal cannot be placed until the levy is formally released.
• Multiple simultaneous tax liens -- Federal AND multiple state liens at the same time signals a tax compliance pattern rather than an isolated incident. Most funders will decline.
• Lien balance exceeds four to five months of revenue -- The risk math stops working for most funders at this ratio.
• No IRS engagement whatsoever -- A merchant who has not contacted the IRS, has no payment plan, has not filed back returns, and has taken no steps toward resolution is a non-starter. The risk of a sudden levy is too immediate.
• Tax lien plus multiple open MCA positions -- This combination is one of the clearest indicators of financial distress. Review our guide on why MCA deals get declined for the full picture of underwriting red flags funders look for.

In these situations, the best service you can offer the merchant -- and your own reputation -- is a referral to a tax resolution specialist before pursuing MCA funding. Many tax professionals can negotiate installment agreements, lien subordination, or offers in compromise that make a merchant fundable six to twelve months later.

A Note on IRS Lien Subordination

In some cases, the IRS will agree to subordinate a federal tax lien to a new creditor. This process allows a new lender or funder to take a senior position on specific assets or receivables, effectively stepping ahead of the IRS claim on those items. Lien subordination is more common in traditional secured lending, but some MCA funders will condition approval on the merchant pursuing an IRS subordination request.

If a funder raises this as a requirement, connect the merchant with a CPA or tax attorney who handles IRS resolution work. The IRS subordination process typically takes four to six weeks, so factor that into your timeline if a funder requires it before funding.

Practical Takeaway for Brokers

Tax liens are not automatic deal-killers -- they are deals that require more work. Upfront qualification, honest expectation-setting with your merchant, targeted funder selection, and thorough submission notes are the ingredients that turn a would-be decline into a funded deal.

The brokers who master the high-risk and lien segment build a reputation for solving problems that other brokers walk away from. That reputation generates referrals from CPAs, tax attorneys, and merchants themselves -- a steady pipeline that most brokers never tap because they assume the deal is dead on arrival.

Start by building a funder panel that explicitly covers the full credit spectrum, including lien situations. Search our funder directory to compare ISO programs and identify funders who are transparent about their appetite for challenging merchant profiles. For brokers building out their panel from scratch, our guide on how to build an MCA funder panel covers the relationship structure and program diversity you need to place deals across every merchant type -- including the ones everyone else turns down.