Past due taxes and tax liens have been on the rise it seems… it is better to know now than to find out later. For those of you who have not talked to Tax Guard, I highly recommend it… they are able to monitor tax deposits and identify potential tax lien concerns before they arise. The days of tax lien searches and payroll tax reporting each month can now be decreased and/or eliminated. This new service has proven to be a definite ‘value add’ for many factors entering into new client transactions and for monitoring taxes and tax liens with existing clients.
Personally, I know many factoring companies using this service as part of their due diligence to ensure prospective clients are up to date on their payroll and other related taxes. Further, since Tax Guard provides an ongoing tax monitoring service, many factors are using this service to eliminate additional client reporting internally while still gaining the value of early detection for such taxes. Jason Peckham with Tax Guard has provided an article about how to address these past due taxes with your clients. However, if you are like me, you would just call them… it’s just that much easier…
Not all representatives are created equal. Many do not work with the IRS Collections Division on a regular basis and the quality of representation can vary widely. The client’s perspective as to the progress of negotiations with the IRS can differ substantially from the actual situation.
Upon learning of an issue with the IRS, the Factor should follow up with the client and representative, if applicable, to see if there is a legitimate plan in place to address the liability. It is never safe to assume that everything is okay simply because the client has a representative. The basic issues are simple – are your client and his/her representative effectively negotiating with the IRS and how am I (the Factor) affected? The answers are not always clear. However, by asking a few simple questions, the actual situation can begin to emerge. There are some specific questions you should ask the client and/or the representative.
1. What is the strategy? Once the liability has been assessed by the IRS, it is a race to resolve the issue before the lien is filed and 45 days pass. There is no time for learning on the fly or exploring how the IRS Collections Division works through trial and error.
Typically, the best strategy to protect the client / taxpayer and the Factor is an Installment Agreement in conjunction with a request for Subordination of Federal Tax Lien (subordination). The IRS cannot take enforced collection (levies) while a proposal for an Installment Agreement is “pending,” an Installment Agreement is in good standing, or for thirty days after an Installment Agreement has formally defaulted. Additionally, a subordination can only be issued if there is a formal Installment Agreement in place.
2. Have financial statements been prepared and sent to the IRS? Almost every resolution strategy with the IRS (except for personal liabilities less than $25,000 or business liabilities less than $10,000) requires completion of two financial statements – forms 433-B (business) and 433-A (personal). The Automated Collection System or Revenue Officer (the two arms of the IRS Collections Division) will use these forms to determine an “appropriate” resolution.
A taxpayer gets one chance to make a first impression with the IRS. It is important that the 433-B and 433-A accurately reflect the taxpayer’s actual ability to pay. A list of assets without corresponding encumbrances or an income and expense analysis that demonstrates the taxpayer can afford more than the requested payment (or cannot afford a payment at all) will likely result in rejection of the proposal and substantially delay the process. If the representative submits poorly prepared forms, the 45 days will likely pass without a resolution (the time will be spent trying to provide support/clarification of the financial information provided), which means the Factor will have to cease funding.
3. Will a proposal be submitted with the financial statements? Too many representatives (inexperienced or otherwise) submit financial statements to the IRS without a formal proposal. The IRS can use the information provided on the 433-B to levy the taxpayer’s bank accounts and accounts receivable. A proposal is necessary to facilitate a resolution and protect the taxpayer and Factor from levy (the IRS cannot levy so long as there is a “pending” Installment Agreement).
4. How am I (the Factor) protected? Generally, there are several ways to address an IRS liability. The existence of a factoring relationship severely limits those options because of the federal tax lien and its impact 45 days after it is filed. Don’t assume that your client’s representative is aware of the factoring relationship. In many cases, the client will fail to disclose important information to the representative. If the representative is unaware of the factoring relationship, a strategy could easily be pursued that does not take into consideration the Factor’s issues and concerns. Additionally, don’t assume that the representative knows how to quickly address these issues. Many representatives address issues with the IRS in a reactive rather than proactive manner. It is much less likely that a local representative who only occasionally works with the Collections Division of the IRS will be familiar with factoring and the implications of an IRS liability on Factors. Finally, keep in mind that a representative answers to the client, not to the Factor (unless other arrangements have been made).
Making assumptions is generally not advisable. This is especially true when the IRS is involved. By taking a few minutes to speak with your client’s representative, you can verify that your concerns are being addressed as well as protect your client’s business from a less than helpful representative.
For additional information on Tax Guard, please contact Jason Peckham, Director of Business Development, (800) 880.7318, Email: jpeckham@tax-guard.com.
Wishing you continued success. The Factor Guru.