In early 2024, the state of Connecticut filed three tax liens against the California-based hospital chain Prospect Medical Holdings for failing to pay $67 million in taxes. Hospitals under Prospect’s ownership struggled to maintain operations, leading to postponed surgeries and disrupted vendor contracts with travel nurses, highlighting the need for effective vendor background checks.
The liens also threw Prospect’s ongoing $435 million sale of three hospitals to Yale New Haven Health into turmoil, forcing all involved parties into a complex financial and legal negotiation. Fast forward a year, and the hospitals’ outlook has hardly gotten any brighter: Prospect filed for bankruptcy after getting sued by Yale to be released from its contract.
This case illustrates how undisclosed tax liabilities can create ripple effects that lead to lawsuits, deal collapses, and even business failure. But by proactively identifying tax liens ahead of any new business relationship through comprehensive background checks, you can avoid getting entangled in a costly scenario like Prospect’s. Below, we’ll explain what tax liens are and how to search for them to protect your business.
First, it’s worth defining what tax liens are.
Tax liens are a type of statutory lien, meaning they’re created by law rather than through an agreement between parties. They result from unpaid taxes, which may accumulate over time or arise due to penalties for late filing, failure to pay amended tax bills, or discrepancies in reported income.
If left unresolved, tax liens can give government authorities the right to seize assets to satisfy the debt. This can include real estate, vehicles, inventory, and even financial accounts. As in the Prospect case, the tax debt complicated the company's planned sale since the state of Connecticut’s tax claims took priority.
In short, tax liens affect not only the business in question but also any partners or clients it works with.
Conducting a tax lien search is a key step in assessing new business relationships for potential risk. Here’s what these searches can help uncover:
Finding tax lien information requires navigating different systems and processes depending on the type of lien involved.
Federal tax liens are recorded by the IRS but are filed with local authorities, typically at the county level or, in some cases, with state agencies. To search for a federal tax lien, you can consult:
Publications like IRS Publication 594: The IRS Collection Process also provide additional guidance on liens and their implications.
State and local tax lien searches vary based on jurisdiction, with some states requiring businesses to check multiple agencies, e.g., Department of Revenue and the Secretary of State.
For businesses looking to conduct thorough tax lien searches, you can also leverage third-party risk management solutions like Business Screen. These services provide fast, accurate insights by consolidating lien data from various sources.
When assessing potential business partners, performing due diligence is essential—and a tax lien search can be one of the most critical steps in due diligence background investigations. By identifying liens early, you can avoid potential legal disputes, project delays, or financial losses.
Rather than navigating the complexities of federal, state, and local systems on your own, consider using a service like Business Screen for more accuracy and efficiency. Contact us to learn more about Business Screen’s lien search solutions.
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