Understanding IRS Levies Part 1 – What Can the IRS Seize? Published October 30, 2015
This is the first post in a three-part series on what lenders need to understand about IRS levies to foresee risks and mitigate exposure. Stay tuned for the next two parts of the series.
Here’s a scenario that all commercial lenders have found themselves in at some point or another – A prospective borrower is seeking funding and has an outstanding IRS tax liability. This likely prompts a series of questions for the underwriter to continue their credit analysis:
• How much do they owe the IRS?
• Is there a tax lien on file?
• Have they been levied or are they at risk of immediate or near-term levies?
• Do they have a payment plan in place that’s in good standing?
• Do I still have confidence the prospect can repay the amount considered for funding?
Given that each client’s scenario is unique, these questions are just the beginning. Considering underwriting commercial finance deals is part art and part science, let’s focus on what we know about the “science” of the IRS levy process and understand what assets the IRS can levy.
The Difference Between Tax Liens and Tax Levies
To start, let’s rule out what tax levies are not. They are not tax liens. We expanded upon this common point of confusion with a previous blog post “IRS Liens vs. Levies: It’s Time to Clear up the Confusion”, but to clarify, a lien is a legal claim against property to secure payment of a tax debt, while a levy actually takes the property to satisfy the tax debt. Therefore, levies are synonymous with seizures, and importantly, may occur with or without the filing of a federal tax lien.
What Does the IRS Actually Seize From Small Businesses?
Congress has given the IRS statutory authority to seize both physical and financial assets to satisfy tax debts.
In reality, the IRS actually seizes a very small number of physical assets such as real estate, inventory, equipment, or trucks because it’s an expensive and inefficient way to collect on tax debts. They have to be physically seized and then sold in order for the IRS to realize any funds from this collection tactic. Additionally, for commercial lenders most of these physical assets are likely secured in a manner that places the IRS in a subordinate position.
More realistically and worrisome for lenders are the financial assets of the business that may be seized by the IRS such as accounts receivables, bank accounts, merchant processor payments, or stock (This is not a comprehensive list of levy sources, but some that are most common and relevant for lenders).
Understanding what can be levied is valuable when viewing the assets of the business in the underwriting stage of the deal. If a prospect has a significant tax issues with numerous financial assets at risk of levy, then your exposure is likely to be increased and should be managed accordingly.
However, understanding what assets are at risk is only part of the risk mitigation picture. In part 2 of the series, we’ll focus on the IRS levy process so you know when the assets are at risk and how to proactively manage your credit risks.