IFA Small Factors Presentation: Tax Guard’s Roundup Published November 9, 2012
On October 25, Tax Guard’s Jason Peckham, Esq. provided an educational seminar at the IFA Small Factors meeting in Las Vegas, NV, to discuss these misconceptions and provide guidance on the kinds of procedural issues that can help factors navigate the tax risk minefield. Misconceptions regarding what the IRS can and cannot do vis-à-vis levy action and what this means for factors were discussed in detail.
Factors who attended the presentation learned from Jason about IRS procedural obligations and recent shifts and trends in IRS collection operations, and had the opportunity to discuss in a roundtable format the practical implications to small factors. In this discussion and Q&A portion of the seminar, two chief topics emerged as valuable takeaways for factors.
First, the IRS can and will levy accounts receivable without first having filed a Federal Tax Lien. A common misconception is that the filing of a Federal Tax Lien is a required step which legally establishes the IRS’ right to collect a balance due, and that levy action cannot occur until this initial procedural requirement is met. This is simply not the case. Procedurally, once a Final Notice of Intent to Levy has been generated, the IRS can levy receivables whether a Federal Tax Lien is in place or not.
For factors, it becomes important to remember what a Federal Tax Lien does and does not do. It has no impact on the IRS’s ability to levy receivables. Instead, the lien secures the IRS’s interest in the receivables and establishes the priority of the IRS’s claim to a tax debt relative to other creditors’ liens. And while securing a senior lien position should mean smooth sailing for a factor, the problematic trend is toward something Jason discussed as a “wrongful” levy. When the IRS issues a levy on receivables that are encumbered by a factor and there is no federal tax lien in place, the action is considered a “wrongful” levy. The levy is wrongful not because the IRS made a procedural error. Rather, the levy is “wrongful” because the IRS does not have a priority secured interest on the assets, because the factor already does. The IRS has taken assets that belong to the factor.
This is a troubling trend for factors, and pushes the risk in the situation back to the lender. With more and more levies issued, but fewer Federal Tax Liens filed, it is important for factors to monitor the IRS’s ability to levy even more closely than they monitor accounts for the filing of liens. David Jencks of Jencks & Jencks, PC, reiterated this point at the IFA seminar. David indicated he has seen an increase in the number of wrongful levies throughout the year. Ultimately, if a wrongful levy is issued it is possible, albeit extremely difficult, for a factor to get the money back from the IRS.
The second key takeaway from Jason’s IFA seminar and roundtable discussed centered on the topic of Installment Agreements with the IRS, and the relative likelihood of getting one when a larger tax liability is discovered. The prevailing misconception in this case is that factors should terminate the lending relationship if it is discovered that the client owes a debt of a certain amount to the IRS. The thinking is that beyond a certain threshold of tax liability, that business will not be able to achieve an Installment Agreement with the IRS and will never ultimately resolve its tax debt. This is not the case. The decision to grant an Installment Agreement to that business is based on its ability to pay, not on the size of the debt. The takeaway here is to remember that if a business is viable and is in compliance with filings and deposits, an affordable agreement can be negotiated regardless of the liability profile. Two specific examples of such agreements- a $5,000 per month plan to resolve a $3.2 million liability, and a $2,500 per month plan to resolve a $1 million liability- were discussed at the IFA roundtable.
As with each of Jason’s prior seminars, the IFA Small Factors presentation was hugely informative to commercial factors. Jason continues to address the current trends in the IRS collection process and provide practical guidance to factors with boots on the ground, and we know many in the factoring industry will be looking forward to his next engagement.