Understanding IRS Levies Part 3 – What Does it all Mean? Published January 15, 2016

This is the third post in a three-part series on what lenders need to understand about IRS levies to foresee risks and mitigate exposure. Be sure to subscribe to the blog to receive all of Tax Guard’s posts.

In Part 1 of our “Understanding IRS Levies” series we covered what business assets are at risk for IRS levy and in Part 2 we discussed when the IRS can begin seizing those assets. These insights will assist you in clearly understanding the risks that a levy could present to your funding—ie, the business’ A/R could be seized, funds in their bank account could be wiped out, etc.

In Part 3, let’s wrap up with a holistic view of what a risk for levy really says about an organization’s creditworthiness and financial health. In other words, what does all this talk about IRS levies mean to the underwriter who is analyzing a credit file?

Tax Levies and a Business’ Creditworthiness

A business that’s at risk of an IRS levy is not to be evaluated the same as a business who has simply missed a tax deposit or has just been notified of a tax liability. The IRS doesn’t immediately file a levy the moment a tax debt is accrued. Rather, it takes time to get to this stage in the IRS collection process.

If we look back to Part 2 of this levy series, we discussed the process that the IRS goes through prior to issuing a levy to seize assets. There are multiple steps, which include numerous warnings and opportunities for a tax debtor to resolve the issues before levies are sent out. This means that businesses facing IRS levies have ignored, for whatever reasons, numerous attempts by the IRS to resolve the liability. This extended ignorance tells you that the business may have a bigger problem.

Anatomy of a Business with a Tax Debt Problem

Businesses typically fall behind on tax responsibilities because of poor cash management, or in less likely instances, intentional theft. Businesses with cash flow problems are afforded time by the IRS’ lengthy collection process, whereas other creditors bang on the door ASAP. Therefore, a levy is, in many cases, a symptom stemming from a larger issue that should be of concern to underwriters such as cash flow, mismanagement, fraud, etc.

When you take a step back from all of this and think about credit risk and due diligence at the highest level– fundamentally underwriters are doing due diligence to determine the business’ financial health and measure the likelihood that the business has the ability to repay the funding. Information about a business’ standing with the IRS should be used by the underwriter to recognize not just an imminent credit risk that a levy could present to their collateral, but also get a better sense of who is their borrower and what is the health of their business.

Tax Guard’s Solution

Tax Guard is able to show underwriters the exact moment that a business fails to pay its taxes and how far along the non-compliant business is in the IRS collection process. This powerful tool provides the insight necessary to truly understand the overall financial health of the business.  The more understanding an underwriter has about the creditworthiness of a business, the more exposure can be removed from the funding decision.

At the end of the day, this all makes for better deals which benefits lenders in reducing bad debt, helps borrowers obtain the proper credit product, and supports the economy as a whole in promoting the overall financial health of businesses.