5 Things a Public Records Search Won’t Tell Commercial Lenders Published October 8, 2014
If you’re a lender trying to determine whether or not a borrower has an outstanding tax liability to the IRS, you likely search public records to detect if any federal tax liens have been filed. Unfortunately, you could be missing out on a large part of the picture needed to accurately measure your true credit risk. The facts remain, there’s important information you are NOT getting with a public records search for IRS tax liens.
Here’s our Top 5 Things a Public Records Search Won’t Tell Commercial Lenders (and what you can do to get the missing information):
1. IRS Levy Risk
We’ve discussed the pitfalls of a public records search that misses a recorded tax lien, a concern we’ll set aside just long enough to say emphatically that the presence or absence of a tax lien does nothing to alert a lender as to a client’s actual risk of levy. Remember, the IRS can, and frequently does, take levy action without ever filing a lien. What is necessary to gauge levy risk is to determine whether the IRS has issued a Final Notice of Intent to Levy. The issuance of this notice is never a matter of public record, and requires contact directly with the IRS, on a case-by-case basis, to detect. This is something that a public records search can never provide.
2. The Existence (or current balance) of an IRS Tax Liability
We’ve beat the drum on the lien issue before, and we’ll give it another refrain here-a lien can only reflect the information the IRS elected to put on it (rarely a full record of account) at a particular moment in time. Its data is frozen in a time capsule, and is never updated to reflect changes in the balances reported. The balance may be several times what you see on the lien, or the balance may not actually exist any more. To read more on these pitfalls in practice, see the hypothetical scenarios presented below.
3. The Real-Time Status of the Account With the IRS.
All tax debtors are not created equal, and finding a tax lien via public records search doesn’t inform a lender as to the nuances of that borrower’s tax liability status which is vital in order to ascertain lending risk.
Consider, for example, the following scenario- a public records search on Borrowers A, B, and C turns up a tax lien on each business for $250,000. A lending decision based on this $250,000 lien information alone could be short-sighted. Consider that a review of each case with the IRS actually reveals the following variations in credit risk:
- Borrower A accrued a $250,000 balance two years ago. The business has been current with all deposit and filing obligations since that time, and is on an Installment Agreement which is in good standing with a remaining balance due of only $15,000. In addition, the case is no longer assigned to the collections system, and the IRS has never issued a Final Notice of Intent to Levy.
Although a tax lien is present on this account, lending to this borrower presents a very low-risk and can likely be funded without a tax lien subordination (read more about tax lien subordinations here), provided the lien is paid in full from the proceeds of the funding.
- Borrower B accrued $250,000 last year from one bad quarter. Since then the business has been current with all filings and deposits, and now owes a balance of $300,000 with penalties and interest accruals. The case is been assigned to a Revenue Officer, who is actively attempting to collect the debt from the business.
The business can still be funded given that an Installment Agreement and a tax lien subordination is negotiated with the IRS, and that the business’ future IRS compliance is actively monitored. This translates to a potentially moderate-to-low credit risk, provided the necessary steps are taken to manage any risks prior to, and throughout the funding relationship.
- Borrower C accrued $250,000 over the course of last year, is not current with filings and deposits, has no Installment Agreement in place, and really owes a balance of $2 million. The case is assigned to an aggressive Revenue Officer, who filed a lien on the other $1,750,000 yesterday, which is why your public records search didn’t catch it. The Revenue Officer also filed a Final Notice of Intent to Levy 45 days ago, so the borrower is exposed to imminent levy action which could attach to the lender’s collateral.
- Due to the business’ ongoing non-compliance they’re not eligible for a subordination of tax lien which, in addition to their risk of a tax levy and less-than attractive credit worthiness, will likely result in no funding. This is a potentially high risk situation, that many lenders would stay from unless the business could significantly turn around its IRS non-compliance.
4. Missing Tax Returns and Compliance Lapses
Let’s face it, knowing about a borrower’s IRS deposit and filing compliance is the only way to begin quantifying risk before a past-due balance gets to the point of IRS final notices, liens, and levies. This information cannot be obtained in a public records search.
Risk-averse lenders should create a highly calibrated, low-risk lending policy informed by this data. It’s also the very data necessary to screen prospective borrowers, monitor existing clients, watch for repeat offenders, and ensure that an existing client keeps their Installment Agreement in good standing.
5. The Ballad of the Original Rodeo
Ask an entrepreneur about his experience, and you might hear the phrase, “this isn’t my first rodeo.” Well, what happened to the first rodeo? The truth is, it is especially common among business owners who have accrued taxes in the past to have a defunct entity, or entities, that you may not know about. Public records searches are based on name matching, not on EIN or SSN, and could cause you to overlook a tax liability which is fully (and perhaps imminently) collectible from the existing entity you’re about to fund.
For example, a public records search of Doe Construction, a sole proprietorship, finds no indication of tax liens. You fund. Your collateral asset is captured by an IRS levy or the loan goes bad because John Doe, SSN: xxx-xx-xxxx, owes Civil Penalty liabilities resulting from accruals by a former entity, First Rodeo Construction. Had you searched IRS records by John’s SSN, you never would have missed this liability. You might have searched public records by John’s name as well, but let’s say the IRS had not filed a tax lien against John for this debt, but had issued a Final Notice of Intent to Levy 45 days ago. There would be no way a public records search could alert you to this risk.
When you consider all that a public records search cannot tell you, it’s remarkable that so many lenders continue to rely on them to measure the full scope of credit risk with respect to the IRS. Because this is “the way we have always done it,” doesn’t mean it’s the way we must continue to do it. Tax Guard Reports will help you fill in your gaps and ensure that you have the most complete information available to you.