The Factor Guru

Tips on accounts receivable financing and business practices.

Posts Tagged payroll taxes

Liens, Levies and “Wrongful Levies” a guest blog by Jason Peckham

Apr 28

Posted by admin in IRS Information | Comments off

There is an assumption that if no federal tax lien has been filed, the lender has no exposure to the IRS.  This is assumption is incorrect.

There is a considerable amount of confusion regarding the difference between a lien and a levy.  A lien is a charge or an encumbrance that a person has on the property of another as security for a debt or obligation.  The most common is a home mortgage.  Generally, the lien determines priority.  Internal Revenue Code Sec. 6323(c) grants creditors limited priority over the federal tax lien to the extent that the loan or purchase is made within 45 days of the filing of the notice of federal tax lien (NFTL) or made before the lender or purchaser had actual knowledge of the filing, if earlier.  This is known as the “45-day rule.”

An NFTL does not divest the taxpayer of his or her property or rights to transfer property.  A levy does the divesting.  A levy transfers constructive ownership to the government.  There is no difference between a levy and seizure, other than the type of asset involved.  Before the IRS can issue a levy, the Service must issue a Final Notice of Intent to Levy (Final Notice; IRS letter 1058 or LT11).  If no appeal is filed within the 30 day window from the date the notice is issued, the IRS can begin levying bank accounts and accounts receivable.

Wrongful Levy

Contrary to popular belief, the IRS does not have to record an NFTL before it can levy bank accounts or receivables.  Once the Final Notice has been issued and 30 days have passed, the IRS can levy bank accounts and / or accounts receivable.  The IRS does not perform a lien search prior to issuing a levy.  As such, the Service has no idea whether the assets on which it is about to levy are secured by another entity, e.g., a lender.

Let’s assume the IRS issues a levy to a receivable, but there is no NFTL.  Let’s also assume that the receivable is collateral for which the lender has a perfected security interest.  As long as the IRS follows its internal procedures (issues the Final Notice then waits the appropriate timeframe or for the appeals process to run its course), there is nothing incorrect about the levy.  The IRS did not make a mistake.

In our example, the levy is “wrongful” because the IRS’s levy attached to property belonging to a third-party, the lender.  Internal Revenue Manual section 5.11.2.2.2(2) (08-24-2010) indicates “A ‘wrongful levy’ is one that improperly attaches property belonging to a third party in which the taxpayer has no rights.”  Therefore, the IRS can levy on the receivable, but the levy is “wrongful” in that the lender has a security interest with priority over the IRS, who does not have a secured interest at all.

The question becomes:  “how can I get my money back from the IRS?”  Generally, there are two options – (1) ask the IRS for the money or (2) file a suit in federal district court.  In the past few months, the number of “wrongful” levies brought to Tax Guard’s attention has increased dramatically.  This is likely a result of, at least in part, the IRS’s new “Fresh Start” program instituted in February 2011.

The Fresh Start program furthered a trend of pushing risk to the private sector by reducing the number of NTFLs.  The program increased the threshold for filing a lien to $9,999.  The IRS will not file (and in some cases may release) federal tax liens if taxpayers enter into Direct Debit Installment Agreements.  The DDIA provisions apply to individuals (sole proprietorships) that owe less than $50,000 and businesses that owe $25,000.  If these agreements default, the IRS can levy bank accounts and receivables despite the fact there is no NFTL.

There are two divisions within the Collections System of the IRS – the Automated Collection System (ACS) and the field (Revenue Officers).  Theoretically, ACS is designed to work liabilities less than $25,000.  However, ACS has control over many cases where the liability is greater than $25,000, but a Revenue Officer in the field has yet to be assigned.  ACS is a computer system and phone bank.  Call 800-829-3903 and a different person answers the phone each time – it is impossible to speak with the same person more than once.  ACS has a tremendous amount of power – it can file liens and issue levies.  There is little oversight – if one asks to speak with a manager, a return call from the manager will never come.  Without a conference with a manager, the IRS cannot entertain an administrative appeal of a “wrongful” levy.

Generally, it is a nightmare to work with ACS.  Moreover, most “wrongful” levies are issued by ACS.  Because of the administrative problems within ACS, it is highly unlikely that a “wrongful” levy can be resolved by ACS.  The representatives within ACS know nothing of lien priority, the 45-day rule, factoring, etc.  The response is typically – “the Service issued the Final Notice, there was no appeal, and we issued a levy.  Oh yeah, your client should have paid its taxes.”  Whereas ACS cannot typically resolve the “wrongful” levy it issued, the alternative is to file a lawsuit in federal district court.  In most cases, this is not feasible or justifiable from a cost-benefit analysis perspective.

The majority of “wrongful levies” issued by the IRS will be on liabilities of less than $25,000.  However, so long as ACS retains authority over cases in excess of $25,000, the possibility of a wrongful levy of $50,000, $100,000, $250,000, etc., still exists.  This is especially worrisome since the GAO indicated in a July 2008 report that an NFTL has not been filed for sixty percent of all unpaid payroll tax liabilities currently in the Service’s inventory.

In the case of the “wrongful” levy, an ounce of prevention really is worth a pound of cure. Tax Guard provides an integrated solution to this problem.  Initially, lenders should use our Initial Report prior to funding to determine whether the IRS is in a position to levy receivables.  Ongoing monthly monitoring will alert factors to liabilities and when Final Notices are issued that can threaten lenders’ collateral.  Finally, the IRS cannot levy while there is an Installment Agreement in good standing.  Tax Guard can negotiate a reasonable Installment Agreement and subordination of federal tax lien, which protects lenders’ clients as well as the lender.

For additional information on this topic or Tax Guard, please contact Jason Peckham, Director of Business Development, 303-953-6325, Email: jpeckham@tax-guard.com. Visit their website at www.tax-guard.com.

Wishing you continued success. The Factor Guru.

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Factoring FAQs

Feb 25

Posted by Gen Merritt in Operations | Comments off

It’s been awhile (once again) since my last post. Yes, we are all crazily busy… Since my last weblog, I have received several questions across various topics. With that said, I think the best and most efficient manner to answer some of these questions is to respond with a few FAQs.

Q. What happens on a buyout from another factor, do we split the invoices?

A. No. When you buyout another factor or even a lender, you are simply paying off the balance owed to them and taking ownership of all the receivables. This is outlined under a payoff, buyout or other agreement.

Day One Funding: $100,000 at an 80% advance equals $80,000 available to the company

Payoff Amount: $50,000

In the situation above, the factoring company would purchase all the receivables and within a tri-party agreement, payoff agreement or other contract, would then send the Payoff Amount to the former factor and the company would be entitled to the remaining availability. This ensures the former security holder on those accounts receivable has been repaid and has released or assigned their security position to you, the new factor. Other elements to consider include: how future payments from existing account debtors will be processed if mailed to the former factor, how those customers or debtors will know about the change in factoring companies, and other concerns.

Sometimes, however, the availability and the Payoff Amount do not ‘line up’ and literally will not work. For a factor paying off a factor, this actually may not work. However, if the Payoff Amount is to a bank, the factoring company may be able to work with that bank to identify a longer term payment structure. For example, this may result in a ‘pay down’ of sorts followed by payments from future fundings or reserve releases to that bank over a short period of time.

These arrangements should be agreed upon between all parties. It is also a good idea to review any contractual arrangements with third parties with your legal counsel.

Q. Do I need to monitor payroll taxes if I have an 8821 form?

A. Yes. The 8821 Form is just a copy of the company’s current status mailed to you (the factor) along with the client. The person noted as that being copied on such mailings and reports (you, the factor) can be changed at any time without notice. Further, this mailing only tells a factor or a lender of what has already transpired. By then, if the company has not been making their payroll taxes timely, it may be too late.

A factoring company concerned about payroll taxes should also request evidence of the actual payroll taxes being sent to the IRS, or the state, as applicable. This could include a statement if the company uses a payroll service or a copy of the 941 form along with evidence of payment of such taxes. Essentially, whatever format the company pays their payroll taxes in is what you want to receive… along with proof of payment of such taxes.

Q. What is retainage on construction clients? What is mobilization on construction clients?

A. Both are typically not permitted by factors for purchase on schedules submitted for funding. Retainage is the portion of the work performed by a contractor that is held back by their general contractor or owner. These amounts, generally ten percent of the invoice amount, are usually not paid until the project itself has been completed. General contractors and owners tend to hold back a portion (or retain it) of the invoice to be paid to ensure that other subcontractors or other amounts that need to be paid do actually get paid. Further, retainage amounts may take several months to pay.

Mobilization invoices are invoices submitted for work ‘to be’ performed. These are billings a contractor or subcontractor submits for setting up or buying materials for a job. No work has actually been completed at this point. Because of this, mobilization invoices may in fact not be paid.

Q. Do I really need to get monthly accounts payable listings from my client?

A. Yes. Even if the numbers and the vendors listed are always the same, continue to get this report. On occasion, companies will sell to the same person they are buying materials or goods from. If you are unaware of this aspect, the invoice you purchased (as a factor) may be offset by the amounts the company owes to the vendor. Without having this accounts payable listing, you may never know… until it is too late.

For example, imagine a scenario where you never reviewed the accounts payable listing and didn’t realize the company (client) had also been sending checks back to their vendor for purchases the company made. The receivables always paid (on your books — the factor’s books) because of this. However, should the client begin experiencing financial difficulties, the company may tell the vendor to offset the receivables owed because of these amounts owed to the vendor or supplier. And sometimes, if the vendor is having financial challenges, they may choose to discount or not pay their invoices (to the factor) because of amounts owed to them on the receivables the factoring company had purchased.

Wishing you success. The Factor Guru.

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More on Payroll Taxes

Oct 19

Posted by Gen Merritt in Accounting, IRS Information, Operations | No Comments

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

 

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Measuring Results

Sep 23

Posted by Gen Merritt in Collections, General Information, IRS Information, Sales and Marketing | No Comments

Yes, we had several questions this week on payroll tax monitoring, 8821 forms with the IRS and past due taxes, along with IRS tax liens. In all cases, we are happy to provide our experience; however, you should also consult your legal counsel or a CPA to insure you are protected. We’ll save this for another time. If you have questions in the interim, you can email us directly. (A link has been added for this form so you can use this now, if you are not already). Note this was updated in August 2008.

What I wanted to talk about in this entry was planning and measuring performance. Do you have the ability to measure productivity… performance… results? How do you know that the processes you thought you established are truly being followed? What tools and management do you have in place? (This works in any business – not just factoring).

Have you ever wondered why marketing/salespeople bring in a lot of leads but minimal results? Have you ever wondered why a collections staff can call on aging invoices all day but with limited success? Some would say it’s a numbers game in both cases. I respectfully would disagree.

Sales can be a numbers game, but wouldn’t it be better to identify who your salespeople are calling on, what they are saying, what they know about the product they are selling? Is it just the features? Or, do they know what the true benefits (and challenges) are for a prospective client? Can they outline those benefits to a prospective client to add value to any new customer? Can they breakdown a good lead from a ‘not a good fit’ lead?

Likewise, in collections, do your collectors just call to identify the status of a payment without understanding what they are calling on exactly? Do they follow up promptly? Is the reason they are calling because of an internal issue in either your company or your client’s company?

In both cases, you will notice, ‘understanding’ is required and needed to produce efficiency in efforts and to maximize the value of your organization.

Although I have lots of ideas about both — I more or less want to pose the question to readers for them to think about their operation, their company, and ultimately their success.

Wishing you success… the Factor Guru.

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