How Silent Liens Can Hurt Lenders Published November 10, 2016
Funding a business is risky. There are many things to consider, for example, is the company solvent? Does it have a healthy balance sheet? And most importantly, does it have any issues with the IRS?
WHAT IS A SILENT LIEN?
Have you ever heard of a “silent lien”? This is a non-public, yet potentially troublesome lien that can affect a lender’s bottom line. According to the IRS’s Internal Revenue Manual:
Congress, through the Internal Revenue Code (IRC), has provided the IRS a powerful tool allowing the Government to protect the American taxpaying public’s interest in collecting the proper amount of tax revenues. This tool is the Federal tax lien (FTL) which is sometimes called the “statutory lien” or “assessment lien.” At times the lien has been referred to as the “silent” lien because, while the Service makes the taxpayer aware of the existence of the lien, it does not make the lien’s existence public unless a notice of the lien has been filed.
In essence, 10 days after the IRS sends the business the initial notice of assessment, a “statutory” or “silent” lien is in place as an operation of law. The IRS does not have to file the notice of federal tax lien (NFTL) or provide public notice to third parties before they can seize assets!
WHAT DANGER DOES A SILENT LIEN POSE?
Imagine a business gets into financial trouble, which happens every single day. The business prioritizes making payroll and paying vendors, deciding to forgo paying taxes for now, which results in trouble with the IRS. When the business approaches the lender looking for some help with cash flow, the lender will likely be unaware of the liability with the IRS.
According to a National Taxpayer Advocate report to Congress, the average amount of time from the creation of the statutory lien (ten days after the initial notice of assessment/liability) to the public record filing of the NFTL is over one year (446 days) for business liabilities. During those 446 days, the “silent lien” is in full effect and there is no public record of the liability with the IRS. Any business in this precarious situation could apply for a loan and there would be no evidence to indicate to the lender there was an issue with the IRS.
The vast majority of lenders would like to know whether their prospective client has an issue with the IRS when making the decision to fund. Relying upon public record searches to uncover federal tax liabilities will only work if the IRS files a NFTL (and even then, the information is of limited utility). What can a lender do to unearth silent liens and gain an accurate and up-to-date summary of the business’s compliance with the IRS? The best start is to understand all the perils of relying upon public record searches for due diligence.