Stay Protected: Don’t Forget the Subordination of Federal Tax Lien Published September 13, 2017

Subordination of Federal Tax Lien in PostWhen lenders are funding or considering funding a company with tax issues, there are many potential hazards. Generally, there are two main forms of exposure for those lenders utilizing accounts receivable as collateral: 1) IRS levy, and 2) federal tax liens:

  1. Levy – IRS enforced collection that allows for seizure of a delinquent taxpayer’s assets, i.e., bank accounts, accounts receivable, etc. Relative to factoring and asset-based lending, the lender’s exposure is the possible IRS levy/seizure of the taxpayer’s accounts receivable, in which case the lender would not recoup its advances.
  2. Federal tax lien – If the lender funds against and collects accounts receivable while in second position behind the IRS, the factor is exposed to “tortious conversion of assets.” This means the IRS can pursue the lender for conversion and “claw back” or force disgorgement of the collected receivables.

How to Minimize Exposure

When funding a business with tax issues, to minimize exposure and preserve the funding relationship, lenders will want to ensure the existence of two instruments that will protect the lender and the client:

  1. Installment agreement in good standing:  The IRS cannot levy while an installment agreement is in place. If the installment agreement defaults and then terminates, the lender generally has approximately 75 days to collect out from the issuance of the “notice of intent to terminate” letter before the IRS is in a position to levy/seize the receivables. Importantly, by itself, the installment agreement has no effect on the lien and the IRS’s secured interest still has priority.

    Understanding how IRS installment agreements protect lenders at each stage can be the difference between continuing to work with your valued client, secure in the knowledge that your interests are safe from the IRS; losing your funding relationship; or worse, getting burnt by the IRS. Learn what lenders need to know about IRS installment agreements in this recorded webinar. 

  2. Subordination: With a subordination of federal tax lien, the lender’s secured interest is put back into first position relative to the client business’s receivables. If the underlying installment agreement terminates, there is no “race to collect out” the receivables. If the IRS attempts to levy the receivables, it would be considered “wrongful.” With a subordination in place, the lender has priority to the receivables, not the IRS, which means the lender is not exposed to tortious conversion of assets.

How to Obtain a Subordination

Obtaining and maintaining a subordination is no easy feat. To begin, there are application nuances, conditional commitments, timelines, collateral types, expiration dates, renewals, installment agreement monitoring, and many other details to consider. This is not something to take lightly when the risks include levy of your client’s accounts receivable and conversion.

We will be drilling down on all these details so that you will have the information to protect your collateral and preserve your funding relationships. Register for our upcoming webinar, “Stay Protected: Don’t Forget the Subordination of Federal Tax Lien” Tuesday, September 26, 2017 at 1:00 P.M. EDT to learn more. 

Please note: There are exceptions to all scenarios presented above and this should not be interpreted as legal advice. Should you have specific questions about your situation please feel free to contact us for a consultation.


Posted By: David Bohrman

As the VP of Marketing, David is responsible for driving overall marketing strategy for Tax Guard including brand positioning, go-to-market execution, and lead generation programs. For the past 15 years, David has held senior positions in early growth and mature companies, leading marketing, operations, and business development teams. Prior to Tax Guard, David was the Director of Marketing of one of the largest tax consulting firms in the country. He holds a B.A. in English and Philosophy from the University of Vermont.