Think the IRS Form 8821 Covers Your Lending Tax Risks? Think again. Published March 3, 2020
The IRS Form 8821, Tax Information Authorization, is an important tool for many lenders and their tax due diligence process. But misconceptions about Form 8821 can cost a lender a bundle.
Believe us we’ve seen it happen. Many lenders have misconceptions about the filing of the form and how it affects their loan monitoring process.
Here we’ve addressed some common myths that we’ve encountered about using Form 8821 to manage your tax due diligence.
1. It’s boilerplate, fill-in-the-blank. Simple enough.
Wrong. The unfortunate fact of the matter is that a majority of Forms 8821 submitted to the IRS are with errors. The IRS will not accept the form if any error or omission is identified, including absurd minutia such as signatures that IRS personnel do not believe sufficiently resemble they name they are to represent, use of the slang thru instead of the proper through, and misidentified tax types and form numbers.
Simply put, it usually takes a tax professional to draft a flawless Form 8821 and to ensure that it is endorsed in a manner that will be processable. Even when accepted and processed, Forms 8821 also need to be refreshed frequently.
2. All I do is fax or mail it in. Simple enough.
Wrong. The IRS provides zero feedback or confirmation that your Form 8821 has been received, processed, and recorded in the Centralized Authorization File. On some occasions, the IRS will do you the favor of sending a letter to let you know what elements of the form they have found problematic, thereby preventing processing. You can count on this memo to arrive several weeks after submission, if ever.
3. Filing Form 8821 will enable me to screen applicants before funding.
Wrong. Assuming a Form 8821 is received and processed, which we’ve established is often a tall order, the IRS does not respond with any particular set of reports or documents that provide a pre-funding assessment of a clients tax compliance, and more to the point, the IRS does not inform newly appointed representatives of any recent lien filings or levy action. This hardly positions a lender to evaluate a client’s tax risk and candidacy for funding.
4. I filed Form 8821 so if any issues arise I’ll get a letter (Part 1).
Well, perhaps. Well take this one in two parts, and give the IRS the benefit of the doubt to begin with. On one hand, assuming the IRS follows through and generates a taxpayer representatives copy of a notice, it is often in the case of liens and levies information after the fact.
Furthermore, and in the context of balance due notices, the problem can quickly become an overload of information: a stack of notices, one for each period, replete with notice numbers and tax code, and with a confusing set of threats and deadlines (This one says pay in ten days. This one says thirty. The other one says sixty. What’s really going on here?)
Bear in mind that these notices are ultimately written to serve a collection imperative, not to provide a tidy report card to a third party. In fact what’s missing in the entire equation, and what does not exist, is a single cohesive notice, written in plain English, which outlines the entirety of a taxpayers delinquent returns and payments, reports any Federal Tax Liens and/or the intent of the IRS to file liens or levies, and clearly establishes the position of any balances due in relationship to the IRS collections process.
Appointees who do receive notices from the IRS will be left to decipher them and organize the data to the best of their time and abilities.
5. I filed Form 8821 so if any issues arise I’ll get a letter (Part 2). Or maybe that letter never comes.
Again, maybe. Disturbingly, the IRS has a well-documented habit of disregarding its obligation to copy appointed representatives on taxpayer correspondence. The Treasury’s very own Inspector General for Tax Administration (TIGTA) recently conducted a study which concluded that IRS personnel routinely neglect to send authorized representatives correspondence and inform representatives of case actions. (Note: the study excluded personal income tax cases and was limited specifically to the small business sector of IRS Collections, in other words, precisely the taxpayers with whom lenders are concerned.)
In practice, what taxpayer representatives observe is that the likelihood of receiving a notice from the IRS is spotty at best. The very actions which are of greatest concern to lenders the filing of a lien or exercise of levy action are those of which you will quite likely be the last to know.
6. No news is good news.
Wrong. This is probably the most perilous assumption a lender could make. Its entirely possible to file a flawless Form 8821, receive no notices of balances due, no notices of lien filings, and no threats of levy, and yet to discover that the taxpayer in question has received levies to each and every available source.
Assuming the pitfalls of completing and executing Form 8821 are surpassed, and assuming the IRS miraculously prevails over the inefficiencies of its own authorization recording system, a perfectly completed and filed Form 8821 is still, at best, an incredibly passive document, and sign it, file it, and wait for the mail is a not-so-diligent due diligence strategy.
While theoretically the 8821 provides the appointee with access to tax compliance information, it makes no assurance of providing the appointee with that data. All parties must remember to distinguish this means to an end from the end itself.