I have a client that operates as an LLC. My client has personal 1040 liability stemming from income generated by the LLC that passed through to my client. Can the IRS levy the LLC’s receivables when collecting the personal liability?
Generally, the IRS cannot pursue a corporation or LLC’s assets to collect an individual shareholder or owner’s personal 1040 federal tax liability. In short, the corporation or LLC has a separate and distinct taxpayer identification number from that of the individual (EIN vs SSN). To learn more, please view our blog, “Are you exposed? Considerations when funding a Single-Member LLC.”
My client has some unfiled tax returns. What does this mean for my risk?
Unfiled or missing tax returns represent a potential issue or liability with the IRS. Once the unfiled returns are filed and processed by the IRS, liabilities may be assessed (depending on whether your client made the necessary tax deposits). While you have no direct exposure for unfiled or missing returns, they can present a serious issue once the returns are filed and a liability is assessed.
On the Tax Guard Report, my client’s Installment Agreement has “potential for default” listed. What does this mean?
There are three requirements to keep an Installment Agreement in effect/ in good standing.
- There can be no periods of liability outside the agreement (the business must be current and compliant with its federal tax deposits).
- All returns must be filed (there can be no missing returns).
- The taxpayer must make all installment payments in full and on time.
If the Tax Guard report indicates “potential for default,” there is a liability outside the agreement and/or there are missing returns. Tax Guard does not monitor installment payments, unless the client is using Tax Guard’s Resolution services.
My client indicated they are already on an Installment Agreement with the IRS. Is a subordination of federal tax lien necessary as well in order to fund?
In this scenario, your client has a federal tax liability and a federal tax lien has been filed. Your client has an Installment Agreement in place, but there is no subordination of federal tax lien. Per the Internal Revenue Manual (the IRS’s procedures, based on the Internal Revenue Code), the IRS cannot levy bank accounts or receivables while an Installment Agreement is in effect. However, you should still secure a subordination of federal tax lien. Without the subordination, your protection from levy is based solely on the Installment Agreement, but you are still funding without priority (behind the IRS). Assuming the Installment Agreement is and remains in good standing, the IRS is not in a position to levy receivables. However, 95 percent of all Installment Agreements with the IRS fail. If the agreement terminates and there is no subordination, there is a race to collect out with the IRS. A subordination provides you with priority and enables you to avoid any race to collect out with the IRS.
If my client enters into an “affordable” agreement, they’ll be paying the IRS forever, right?
No. The IRS’s ability to collect delinquent taxes is not infinite. Rather, it’s limited by a statute of limitations, which is generally ten years. Once the statute of limitations expires, the IRS can no longer collect the debt. At that point, your client can stop making the monthly installment payment.
A large IRS liability will require large monthly payments, right?
No! Generally, when your clients (or their consultants, attorneys, and/or accountants who don’t deal with the IRS Collections Division on a regular basis) first speak with the IRS, their first question is, “What will it take to make this go away?” This allows the IRS to frame the issue, and they frequently respond with “25 percent down and the rest paid within two years” or something similar. Your client may agree to those terms because they believe they have no alternative. A large down payment combined with a large monthly payment will create problems with your client’s cash flow, the agreement will terminate, and then the business will be in worse shape than before.
There is no basis for the idea that the IRS requires 25 percent down and the remainder paid within two years. In fact, it’s the exact opposite. The Internal Revenue Manual indicates, “Installment agreements must reflect taxpayers’ ability to pay on a monthly basis throughout the duration of agreements.” The amount of the monthly installment payment should not be based on the size of the liability or an arbitrary timeframe. Rather, the monthly payment should reflect an amount the business can afford, which will substantially decrease the likelihood that the agreement will terminate.
My client owes a lot of money to the IRS. They won’t allow my client to continue to operate, right?
Many lenders and consultants, even business owners themselves, put too much emphasis on the total amount owed to the IRS. They see a substantial liability and conclude there is no way the IRS will allow the business to continue operations. This assumption is incorrect. If the business can become and remain current and compliant, an Installment Agreement can be negotiated with a payment the business can afford, regardless of whether the amount owed is $100,000 or $1 million or $10 million.
My client has a federal tax lien. I shouldn’t fund, right?
There’s no need to panic when a liability with the IRS, even a large one, is uncovered. There is a solution. If your client can become and remain current and compliant with its tax deposit requirements (and service its other debts), an Installment Agreement can be negotiated to address the delinquent liabilities – regardless of the size of the liability. The IRS cannot levy bank accounts or receivables while the Installment Agreement is in effect and in good standing. More importantly, the Installment Agreement is a prerequisite for a subordination of federal tax lien, which puts you back into the first secured position relative to the inventory and receivables, despite the existence of a federal tax lien. So long as your client has an Installment Agreement in place with the IRS and you have secured a subordination of federal tax lien, you have nothing to fear from the IRS.
My client told me they already have a representative working with them to fix their tax issues. What would Tax Guard do differently?
There are a lot of representatives out there (local attorneys, local accountants, and tax resolution companies), but even those that are good at representing their clients before the IRS generally do not understand lenders’ priority concerns and/or do not regularly update the lender. At Tax Guard, we specialize in resolving issues with the IRS (and/or state taxing authorities) for businesses that work with banks, asset-based lenders, and factors, so we have a unique understanding of lenders’ concerns and what is needed to preserve your funding relationship. Additionally, Tax Guard has a transparency provision in our agreement with our clients, allowing us to keep you updated throughout the resolution process.
Should I refer my client even if I don’t plan to fund the business identified with tax problems?
How can I see what you have done for others and what my client can expect from Tax Guard?
Please view Tax Guard’s success stories and some examples of our recent work.
When should I refer my clients to Tax Guard?
Be proactive. Tax Guard’s reporting service is designed to be an early warning system. The earlier an issue is identified (preferably before the lien is filed), the easier it is to resolve, the better the outcome, and the more likely it is that we can preserve the funding relationship. Once a federal tax lien is filed, there is a limited window to complete the complex negotiations. While it is possible for Installment Agreement to be negotiated at that point, it is much easier – and the monthly payment tends to be less – when the negotiation process begins prior to the filing of a federal tax lien.
I have a client (or prospective client) with an IRS (and/or state) tax liability. Is there someone at Tax Guard who can help me review the issues relative to risk, funding, resolution, etc.?
If you have any questions regarding either the IRS in general or a specific situation, contact the Tax Guard Resolution Team at 303-953-6325 or firstname.lastname@example.org.
What’s the process for referring a client to Tax Guard?
- Contact Tax Guard at 303-953-6325 or email@example.com to review the situation in more detail.
- Contact your client. It helps to make sure the client understands that if the situation is not resolved, the funding relationship could terminate – but that Tax Guard can resolve the issue and preserve the funding relationship.
- Email your client introducing Tax Guard, copying your client and Tax Guard on the email.
How long does a subordination of federal tax lien remain in effect?
Generally, subordinations are not indefinite. Typically, a specific date or timeframe (three to twelve months) is included in the subordination documentation. The Internal Revenue Manual indicates: “The subordination must be for a period no longer than one year.”
When can the IRS begin levying my client’s bank account and receivables?
Before the IRS can levy bank accounts or receivables, the IRS must issue a specific document providing a “final” warning to the taxpayer. This document is the “Final Notice of Intent to Levy,” which is frequently seen as Letter 1058 or LT 11. The Tax Guard report reflects the date the Final Notice of Intent to Levy was issued under the “Levy Risk” section.
What is the difference between a levy and a lien?
A federal tax lien provides notice of your client’s liability to third parties (including you), secures the government’s interest on your client’s assets (real and personal property), and establishes priority. A federal tax lien does not divest the taxpayer of his or her property or rights to transfer property. A levy does the divesting. Before a Revenue Officer can issue a levy, the IRS must first issue a Final Notice of Intent to Levy and provide the taxpayer with 30 days to appeal. If 30 days pass without a resolution or an appeal by the taxpayer, the Revenue Officer may proceed with enforced collection (levies on the taxpayer’s bank accounts and/or accounts receivable). Importantly, the IRS does not have to record a notice of federal tax lien before it can pursue enforced collection activity
Can you tell me more about the 45-day rule for lenders?
The 45-day rule is an exception to the general rule of priority (which is “first in time, first in right”). Once a federal tax lien is filed, the IRS moves into first position on any revolving assets – inventory and receivables – on the date the lender acquires actual knowledge of the lien, or 45 days from the date the lien is filed, whichever is earlier. The lender’s potential exposure is the total amount of the liability subject to the federal tax lien.
Download our white paper to learn more about the 45-Day Rule.
Fees & Services
Can Tax Guard assist in securing a subordination of federal tax lien?
Absolutely. There are generally three reasons why a subordination of federal tax lien is rejected.
- The application may be premature. A prerequisite for a subordination of federal tax lien is an Installment Agreement in good standing.
- There may be compliance issues. The IRS will not approve a subordination request unless your client is current and compliant with its deposit and filing requirements.
- The application may be incorrect. There is specific information required to be submitted with the subordination application, and the instructions included with the IRS’s subordination application form are not terribly helpful.
Tax Guard’s unique understanding and experience with these issues enables us to overcome them in securing subordinations for our clients.
How long does it take to negotiate an Installment Agreement with the IRS?
It varies. There are a couple factors that are beyond Tax Guard’s control. The first is whether there is a revenue officer assigned to the case. If there is no one yet designated for Tax Guard to speak with at the Internal Revenue Service, the process can take a little longer. The second is whether the client is making the current federal tax deposits in full and on time. If tax liabilities continue to accrue and the client has not yet “stopped the bleeding,” the IRS or state taxing authority will not enter into an agreement. However, when there is a revenue officer assigned to the case and the client is current and compliant with the tax deposits, the typical time frame is approximately 30 days. It can take more or less time depending on a number of other factors.
What does Tax Guard charge for its resolution services?
Tax Guard’s fee is based on three criteria:
- Amount of the liability
- Work involved
- Sense of urgency
Because every situation is different, your client will need to speak with a member of our Resolution team to review theirs in more detail. At the end of that initial conversation, Tax Guard will be able to provide a review of the services Tax Guard can offer, as well as the associated fee.