IRS Lien Searches-What The Decrease in Lien Filings Means for Commercial Lenders Published May 12, 2014
Sometimes trends are short lived (think the entire 80s) and other times trends gradually evolve into an accepted standard. As such, priorities must shift with trends, especially as they become the new reality. For commercial lenders, adoption to these new paradigms must be accounted for when considering how best to measure a borrower’s credit risk.
We’d never put our foot down and declare the IRS as a trendsetter, that is unless you think overspending at conferences and producing educational line dancing videos is your idea of trendy (see the As-Seen-On-TV video below). If you dare, the good stuff begins at the 30-second mark.
But for those of us here at Tax Guard who live, breathe, and cough up the smog of IRS collection policies and procedures, we can tell you one thing, the IRS has set a new trend in their lien filing procedures and they’re sticking to it.
In our prior blog posts, “The Notice of Federal Tax Lien as an Artifact” and more recently, “The IRS Filing Less Liens Increases Risks For Lenders” we discussed how the IRS’s 2011 to 2012 shift in filing less tax liens was an increased risk for commercial lenders. And in tune with this historical shift, the IRS is not willing to let this trend reverse in 2013.
Just reported in the IRS’ Fiscal Year 2013 Enforcement and Service Results, is another 15% drop off in IRS lien filings from 2012. This is the third straight year of decreased lien filings, totaling 45% less liens filed by the IRS since 2010. It’s quite safe to say that this trend is now entrenched in reality.
Many lenders that we discuss this situation with are working off the assumption that the IRS’s trend of filing less liens correlates with a decrease in delinquent taxpayer accounts. This is not the case. Actually there is a converse relationship between these data points. Simply put: the IRS’ inventory of delinquent taxpayers has been going up every year since 2004. That too is a rock solid trend.
The question then becomes, “If IRS lien filings are down, but yet there are more delinquent taxpayers, how should the commercial lender respond accordingly to accurately assess credit risk?”
That’s an easy answer–stop looking for, searching for, and paying for public record searches for IRS tax liens. This is not to say that identifying IRS tax liens serves no purpose, it’s just that in doing so to determine if a borrower is paying taxes or not is a flawed formula. If a tax lien is filed. It’s too late.
For commercial lenders, it boils down to these two principles of understanding:
1. Credit risk is NOT created when the IRS decides to file a lien.
2. Credit risk IS created when a borrower fails to pay the tax and/or file the return.
It’s not time for risk managers to be trendy. The sooner that commercial lenders can align their due diligence with the new standards of IRS practices, the healthier their lending portfolios will become.
And that’s just the reality.