IRS Tax Liens and Invoice Factoring
Subordinate Your IRS Tax Lien to Bankers Factoring
Can Invoice Factoring be Used with Tax Liens?
The 45 Day NFTL Problem
Forty-five days after the IRS files a Notice of Federal Tax Lien (NFTL), the government has a priority interest in your Accounts Receivable (A/R). What does this mean? If the IRS chooses to issue a levy to your A/R, your customer is ordered to pay the IRS rather than your lender.
Your collateral is gone, your income will be cut off and your factor (or another asset-based lender) will attempt to collect out. If your factor/lender sees tax trouble coming ahead, you can expect them to get very jumpy and threaten to cut off your funding sooner rather than waiting to find out what happens. You might be considering bankruptcy as an option to get relief from your cash flow problems as paying taxes becomes even more problematic.
If you rely on A/R lending to fund your business, any IRS tax debt must be resolved quickly and efficiently. Ideally, you will be able to find a solution to your business taxes before the IRS files a Notice of Federal Tax Lien (NFTL) and before your lender finds out. But it doesn’t always work out that way, especially if you have a traditional bank loan.
Your lender may run routine public record searches on you and/or your business as part of their business loan due diligence. They may even be savvy enough to check your IRS records to uncover tax problems before they reach the NFTL filing stage. Today’s lenders are getting more and more sophisticated in their approval and monitoring practices. If a tax debt or other issue is discovered, your lender will put enormous pressure on you and your business to pay the total tax debt. They may even compel you to hire a tax resolution company with whom they have a business relationship.
It is possible to survive an IRS tax lien with your factoring agreement in place. But you have to act now to secure an IRS Installment Agreement and Subordination of the tax lien to your factor agreement. It also helps if you can successfully communicate your payment plan to your lender.
The Tax Lien-Factor Solution: Bankers Factoring has decades of combined, in-house experience dealing with IRS tax lien and subordination agreement issues and is a leader among invoice factoring companies for legal claims, tax levies, and cash advances even with taxing authorities filing a lien.
Pre Tax Lien – IRM 184.108.40.206 (11-09-2015) specifically identifies factoring in an example used to demonstrate when it is appropriate to Defer the NFTL Filing (example B under “Following are examples of when it is appropriate to defer the filing of an NFTL:”). If you catch your Revenue Officer before a tax lien is filed, refer to this section of the IRM and request that she defers the filing of the NFTL. If she denies your request, you may speak to her Group Manager and file a Collection Appeal Program (CAP) request.
Step 1 of your tax problem solution.
Installment Agreement (IA) – IRM 220.127.116.11 (03-04-2011) states that the IRS cannot levy assets while a formal Installment Agreement(IA) to satisfy the tax debt is in place. An IA acceptance letter from the IRS will allow your lender to keep the money flowing through accounts receivable financing so payroll taxes and your employees can be paid.
Step 2 of your tax problem solution.
Subordination – The IRS will consider subordination of its lien position on your A/R to your invoice factoring company or other asset-based lenders. The Subordination adds another layer of protection when paired with the Installment Agreement. The lender will remain in the first position on all A/R used as collateral while the IA and Subordination are active. This prevents your lender from having to compete against the IRS for receivables that are funded while the Subordination is in effect.
If you don’t secure an IRS Subordination, you risk the IRS going after the A/R that were already used as collateral and funded if the Installment Agreement defaults. IRM 18.104.22.168.1.1 (09-30-2015) provides specific guidance on Subordination to Factoring Agreements.
IRS Notifications – The IRS Subordination Agreement indicates that the IRS will notify the involved parties in writing in the case of default of the Installment Agreement. This should also give your lender some peace of mind that they will not be left in the dark. You will sign form 8821, Tax Information Authorization for your lender to submit to the IRS. It will allow your lender to receive copies of all IRS correspondence sent to your business.
Having cash flow and tax issues, and don’t know where to turn? Bankers Factoring can help get you funded AND deal with federal and state taxing authorities.
Ready for the owner-employees of Bankers Factoring to fund your entrepreneurial dreams even with Tax Issues? Call 866-598-4295 or go to Bankers-Factoring-Application.
Disclaimer: We are not attorneys and this article should not be considered legal advice. Please consult an attorney or tax professional if you need advice.