45-Day Rule: Proactive Approach to Avoid Getting Burned By the IRS Published March 8, 2019
In our previous posts on the 45-Day Rule, we touched on what you need to understand about the 45-Day rule itself and walked through a typical funding scenario where the 45-day rule applies. In this post, we’ll cover what are the proactive steps you can take to stay ahead of the 45-day rule and protect yourself from potential losses due to federal tax liens.
A PROACTIVE APPROACH FOR LENDERS TO AVOID GETTING BURNED BY THE IRS
- First, you need to see your prospective client’s entire picture with the IRS prior to funding. Be aware of your prospect’s standing with the IRS BEFORE a federal tax lien is filed and the funding relationship is jeopardized. 60% of all unpaid payroll tax liabilities currently in the IRS’s inventory DO NOT YET have a tax lien filed against them. To get ahead of any potential issues related to the 45-day rule, you should be searching for federal tax liabilities, in addition to federal tax liens, PRIOR to funding. Additionally, you should be monitoring for federal tax liabilities every thirty days while funding.
- Should you discover that your client has an IRS liability, protect yourself and your client from levies against the receivables and bank accounts with a formalized and documented Installment Agreement with the IRS. Per the Internal Revenue Code, the IRS cannot seize (levy) assets, e.g., receivables or bank accounts, while an Installment Agreement is in effect.
- After the Installment Agreement is in place, secure a subordination of federal tax lien from the IRS. Without a subordination, your protection is solely dependent upon the Installment Agreement remaining in good standing. 95% of all Installment Agreements with the IRS fail and are subsequently terminated. As such, the subordination is necessary to provide additional protection to lenders by maintaining a priority secured position relative to the receivables, thereby protecting the lender from IRS levy as well as exposure to a suit for tortious conversion of assets.
- Finally, monitor your client’s ongoing compliance with the IRS to ensure the Installment Agreement does not default and your UCC1 maintains priority position throughout the funding relationship.
TAX GUARD SOLUTION
Tax Guard provides peace of mind to lenders with a Tax Guard Report identifying tax liabilities prior to the federal lien filing (#1 above). When tax issues are identified, Tax Guard’s resolution experts can provide a transparent resolution strategy for both you and your clients to ensure there is no uncertainty, collateral loss, or disruption of funding (#2 and #3 above).
Want to learn more? Check out our white paper, Understand the 45-Day Rule to Avoid Getting Burned by the IRS.