IRS Issues Do Not Kill All Factoring Transactions

Factors rely on the accounts receivable for collateral against their funding activities. That is a non-negotiable item for most of us and will NEVER be compromised.

So, what does that mean?

Very clearly, the receivables must be free of any lien, levy, or claim by any financial institution, court or individual resulting in the factor’s not being able to secure a first position UCC Financing Statement. In most cases, the factoring client’s strongest (and probably his only) asset is the A/R.

Like hungry lions competing for prey, lenders (in which I will include factors even though we know better) jockey for position to be the primary secured party. In the event that IRS is one of those lions, they always seem to be the biggest,”baddest,” and toughest one in the pack! Their right to secure tax deficiencies with A/R supersedes every other lion out there.

So one will naturally assume that once an applicant for factoring is discovered to have IRS issues, lenders (same definition as before) will run for cover rather than commence or continue a transaction with IRS in the mix. The response is “yes they would” but not all!

Some of us know how to work within regulations, rules and statutes that can actually result in providing financing while the A/R is encumbered by IRS. Most factors will choose to just bail out at the sight of “IRS intent to levy,” very few will employ those measures that will allow for safe and continued funding. So one asks, why do most factors run from transactions in which IRS has first rights to the collateral (A/R)? Two reasons immediately come to mind; 1-the factor is not aware of how to work with IRS, 2-it requires too much work and time to get this accomplished.

Believe it or not, nowadays we are dealing with a kinder, gentler IRS! They will look for a way to work with lenders that will support the business in trouble, which will ultimately result in the business strengthening and having the ability to pay off the obligation.

What are the woes that we see? Listed here are the most common issues:

  • non filing of 940 (federal unemployment) or 941 (federal payroll tax) forms,
  • non-payment of the taxes associated with these forms,
  • not filing corporate or personal tax returns and not paying any tax associated with these, and
  • defaulted or delinquent on an existing installment agreement…to mention a few.

For all or any of these issues, the IRS gets a bit upset.

As a referral source/consultant you should get to know the very few of us who, when presented with a factoring transaction, expect to see issues, and most likely ones dealing with Uncle Sam. About one year ago, we had a home health provider as a client that already had an IRS levy for 36K per month (on a $250,000 tax issue). The levy was ended, an installment plan was put in place and a $5,000 payment was negotiated instead of the levy amount. During this entire process we funded that client and over the course of one year, he finished his tax liability (paying more as he grew each month), and was able to get discharged from the usual penalties and interest once the principal part was paid off.

In factoring there is no such thing as a pretty transaction. The reality is to evaluate the degree of ugliness. However tax issues in most cases do not preclude a transaction from closing as long as everything is disclosed by the client (which ultimately gets discovered anyway), and the IRS is willing to listen.

About the Author: Fred Leder Factoring With Xynergy Capital

Xynergy Healthcare Capital LLC is a factoring organization focused on small to mid-sized healthcare providers nationwide.

For more information contact Fred Leder at (954) 519 2376 or by email at fleder@xynergycapital.com.

Comments

  1. Hello Fred

    I enjoyed your article about IRS tax issues and it is true that so many factoring companies will shy away from clients with such issues. I admire your company for taking on these challenging situations.

    As a professional tax resolution firm, we have handled many tax issues for factoring clients where the factor was not experienced in this area., We too have had great success, on behalf of these companies, in negotiating with the IRS and enabling the factor to fund the client and protect collateral.

    Our unique understanding of a factor’s needs in these situations comes from our background in the commercial finance industry as consultants and intermediaries. In fact, if we come across a situation where you can be helpful with financing, we will gladly refer the client to your company. Should you know of anyone in the industry who could benefit from our tax resolution services, please feel free to send them our way.

    Also, please visit us online at http://www.settleirstaxliens.com.

    Kindest regards,

    Richard

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