Your Client Has An IRS Liability: Be Proactive Published October 21, 2016
The wisdom of the saying, “Never put off until tomorrow what you can get done today” is not lost on me. Unfortunately, I am more likely to follow the, “If it weren’t for the last minute, nothing would get done” philosophy. It’s human nature to put off projects or tasks we don’t enjoy. Most of the time, it’s understandable, and even though waiting until the last minute makes the project or task harder and/or more chaotic, it’s still possible to get it done.
Of course, there are always exceptions. And negotiating with the IRS is a huge exception.
A few times a month, I’ll speak with a lender confronted with a common issue. The lender indicates a federal tax lien was filed on their client 45 days ago (or more). The question they ask is, “What can be done to fix the issue and preserve funding at this point?” My follow-up question is whether the lender is willing to fund beyond the 45th day (typically this is not advisable, but there are exceptions on occasion). Of course, the answer is usually “no.” I then spend 30 minutes reviewing why there are no “magic bullets” when negotiating with the IRS, and that resolving the problem will take time – likely more time than we have, at this point. This is obviously not what the lender wants to hear, but unfortunately that doesn’t make it any less true.
This point is essential: If a lender is funding, using the receivables as collateral, and wants to preserve the funding relationship, negotiations with the IRS should begin BEFORE the federal tax lien is filed. If the lender waits until the last minute to address the issue, the client is likely DOA (dead on arrival). There is nothing more frustrating than the DOA conversation, especially since the situation is entirely avoidable if the lender and client work proactively to address the issue. In short, the earlier we can begin negotiations with the IRS, the easier it is to resolve the issue, the better the outcome, and the more likely we are to preserve the funding relationship.
Once the IRS files a federal tax lien, the funding relationship is immediately threatened. The IRS moves into first position relative to its secured interest in the inventory and/or receivables based on the earlier of the following: the lender’s actual knowledge of the federal tax lien or 45 days from the date the lien is filed. (We made this handy video to further explain the 45-day rule.) Once the lender is funding in second position behind the IRS, there are two risks:
Levy. The IRS can levy bank accounts and accounts receivable (AR). If an AR levy is issued, the receivable will send the money to the IRS, not to the lender. As such, the lender will not recoup its advances.
Conversion. The IRS could pursue the lender for tortious conversion of assets on any receivable funded (and subsequently collected by the lender) beyond the 45th day from the date the lien was filed. As such, the IRS could “claw back” or force disgorgement of the collected receivables.
For any lender, both the levy outcome and the conversion outcome represent an unacceptable outcome. Here’s how these outcomes can be avoided…
There are two items required to protect the client, protect the lender, and preserve the funding relationship when there is an IRS liability. The first is an installment agreement. With an installment agreement in place, the IRS cannot levy bank accounts or AR. The formal agreement protects the taxpayer/client as well as the lender.
The second is the subordination of federal tax lien, which puts the lender back in first position relative to the client’s receivables. A prerequisite or requirement for a subordination of federal tax lien is an installment agreement in good standing. If there is no installment agreement in place, the IRS will not consider the subordination request.
Tax Guard Resolution can assist your client in obtaining both items.
The filing of the federal tax lien and the existence of the 45-day rule presents a plethora of timing issues. The lender wants the issue resolved within the 45 days (if not sooner). However, the IRS process does not move that quickly. A common question is, “How long does it take to secure an installment agreement with the IRS?” The short answer, which is not terribly helpful, is, “It depends.” Assuming there is a revenue officer assigned to the case and the client/business is making federal tax deposits in full and on time (a requirement for an agreement), a reasonable expectation for negotiation of the installment agreement is approximately 30 days. Agreements have been negotiated much quicker, e. g., one day, but that is not the norm. If the client/business is not making federal tax deposits in full and on time and/or there will be a liability for the current quarter, it will take longer than 30 days to negotiate the agreement.
Once the installment agreement is in place, lenders should assume that it will take an additional 30 to 45 days to secure the subordination of federal tax lien. Tax Guard works with revenue officers to negotiate installment agreements. However, we must secure the subordination of federal tax lien through a different group: Advisory and Insolvency. Every lien issue that lands on an advisor’s desk is an “emergency” to the taxpayer. Since cases cannot be prioritized based on urgency, the advisor will work each issue on a “first in first out” basis. Essentially, the time required to obtain the subordination of federal tax lien is based on the advisor’s workload and inventory (and this assumes the application for subordination was filed properly and the client qualifies for a subordination in the first place).
At this point, you may have noticed that there is a fundamental flaw in the process. Once the federal tax lien is filed, there is a 45-day timeframe to secure the installment agreement and subordination of federal tax lien. However, if the installment agreement takes 30 days to negotiate and the subordination requires another 45 days, the client (or its representative, or even the lender) is trying to cram approximately 75 days of work into 45 days or less.
As with installment agreements, it is possible to secure a subordination of a federal tax lien in a day or two (we’ve done it on occasion), but it is not the norm and should not be any lender’s expectation. Unfortunately, the length of time needed to secure subordinations is increasing.
Trends in Timing
There is a popular theme in Congress to “stick it” to the IRS and decrease its budget. Given the general sentiment surrounding the IRS, the position is understandable and might seem to make sense … up to the point when you need something from the IRS. Due to budget reductions over the past several years, the IRS has not hired employees to replace those employees who leave, retire, etc., who provide customer service to taxpayers. Today, there are fewer revenue officers and technical advisors than there were several years ago. Unfortunately, the number of IRS liabilities and the need to address lien issues has not decreased. Because of budget cuts and the effects on hiring, almost every Advisory and Insolvency office now has fewer employees, but larger caseloads. This results in longer turnaround times for installment agreements and subordinations of federal tax lien, which increases the importance of beginning negotiations before the IRS files a lien.
Because of the inherent limitations within the IRS, it is imperative to begin negotiations for an installment agreement and outline the terms for the subordination of federal tax lien BEFORE the IRS files its lien. By initiating the resolution process when a liability is first identified (as opposed to when a federal tax lien is filed), we can address any underlying issues that could create problems with the IRS accepting an installment agreement, e.g. missing returns, federal tax deposits, etc. We can explain the impact a federal tax lien will have on the funding relationship to the IRS, and prevent or delay the filing of the federal tax lien. While we may not be able to prevent the IRS from filing a federal tax lien in perpetuity, we can delay the filing of a federal tax lien until the installment agreement is approved and reduced to writing. At that point, we have the full 45 days to secure the subordination of federal tax lien. With sufficient time, we can protect the client, protect the lender, and preserve the funding relationship.