Getting back to a prior question… “Why are payroll taxes important?”

Delinquent taxes and IRS liens can be very disruptive to businesses and to lenders/finance companies. If companies are unsure how to calculate these taxes or what effect delinquent taxes may have on a business, visit the IRS Payroll Taxes Educational Module  and other information available from the IRS at www.irs.gov. Sometimes, when working capital becomes tight, the last bill to be paid is usually the payroll tax bill due the IRS.

Once delinquent and should such taxes remain unpaid and continue being past due, penalties are assessed. Eventually, a Federal Tax Lien (FTL) would be placed on the business. Many times, the lien filing date is for a period from up to two or three years ago.  The tax period will be reflected on the lien filing.  Any tax periods since that date would need to be evaluated to see how far behind a company truly has become on their taxes. 

When a Federal Tax Lien (FTL) is filed, it is a negative item on the credit bureau report of the company.  It may also result in creditors calling in their notes as they become aware of the FTL.  The FTL generally becomes the most senior claim against the company’s (or debtor when referring to UCC and liens) assets with the exception of first mortgage holders who have properly filed financing documents. The FTL may also displace the primary security position of factoring firms lending on accounts receivable and bank revolving lines of credit 45 days after filing (each situation is unique and must be considered on individual circumstances). Certain claims may trump an FTL such as legitimate mechanic’s liens, local taxes, and perfected landlord liens.

In some jurisdictions, local law provides for separate filing of liens for real property and personal property. In that case, the IRS may file two identical liens, one under personal property records and one under real property records. It is important to note that the IRS does not necessarily have to file under the exact legal name of the corporation and may file under a ‘variety’ of the name.

The FTL is the basis for IRS legal authority to foreclose on debtor assets by conducting a seizure. Since the IRS Reform Act of 1998, seizures by IRS Revenue Officers have dropped dramatically. The lien is not to be confused with an IRS levy. The IRS can levy on a debtor taxpayer’s bank accounts or wages without a FTL. The IRS only needs a valid assessment and must have served legal notice in the form of a certified mail letter to the company’s last known address 30 days prior to levy. However, often the IRS has filed an FTL before levy action even though it is not required.

When a FTL occurs, the lien must be resolved.  This is not just for the business owner themselves, as the IRS will eventually seek collection from the customers of the business as mentioned previously, but also for any secured lender/commercial finance company.  Again in the case of the factoring company, the IRS will ‘prime’ the liens in place.  The factor will have 45 days from the earlier of their discovering the lien or from the date of the filing to essentially collect out of the funds exposed on the assets purchased.  Any monies sent to the company after those dates are subject to the IRS lien filing. 

This does not affect monies already sent to a company (i.e., a term loan based on equipment or real estate whereby the funds were paid up front and the payments are amortized over a set period of time).  However, in the case of a line of credit or factoring where new funds are being paid out while collections are being paid, that lien position would be critical.

This can become a concern for factors and lenders. Resolution alternatives are available. We will address those in a future posting. Until then, monitoring these taxes on an ongoing basis can be critical to a factoring company.

So, until the next time, happy reading…

The Factor Guru