Lien, Levy, and Other Common IRS Terms for Commercial Lenders to Understand Published March 21, 2017

There are several terms which frequently come up in our conversations with commercial lenders who need to understand the implications of IRS rules. Here is our list of the most common terms and their definition.

45-Day Rule

Set forth in Internal Revenue Code section 6323(c) and (d). The rule governs priority between a filed notice of federal tax lien (NTFL) and a lender’s secured interest in its clients’ revolving assets, e.g., receivables, inventory, etc. Lenders are granted priority over the IRS to the extent that the loan or purchase occurs within 45 days of the filing of the NFTL or before the lender or purchaser acquires knowledge (actual or constructive) of the filing. If receivables are purchased or used as collateral 46 days after the date of the NTFL, the lender is in second position behind the IRS.

Federal Tax Lien

Used by the IRS to provide public notice to third parties and establish priority of a claim against a taxpayer. The federal tax lien is a blanket lien that attaches to all existing and after acquired property (e.g., equipment) and to all rights to property (e.g., accounts receivable). A federal tax lien does not divest the taxpayer of his or her property or rights to transfer property (a levy does the divesting).

Final Notice of Intent to Levy

Usually takes the form of IRS letter 1058 or LT11. Generally, the IRS cannot levy or seize assets unless and until this letter is issued.

Levy

The legal seizure of property to satisfy a tax debt with the IRS or state taxing authority. Taxing authorities can garnish wages and take money from financial accounts (e.g., bank accounts and receivables).

Tortious Conversion of Assets

A common law civil action (tort) that exposes a lender to damages and applies when the lender intentionally interferes with personal property (e.g., inventory, receivables, etc.) belonging to another entity (for our purposes, the IRS).

UCC1

Form that should be filed when a lender extends money to a debtor and the debtor pledges collateral to the lender in exchange for the loan. The form is filed to perfect a lender’s security interest in the debtor’s personal property based on the requirements of the Uniform Commercial Code (i.e., giving public notice), thereby establishing a relative priority with other creditors of the debtor.

Wrongful Levy

A levy wherein the IRS seizes assets that belong to the lender. The “wrongful” label is not applied because the IRS cannot levy – assuming they have issued the final notice of intent to levy, the IRS can levy at any time. However, if the lender has a secured interest in the receivables while the IRS does not (or the lender’s security interest has priority over the IRS’s), the IRS’s levy is considered “wrongful.”