IRS Tax Liens and Factoring

Every so often we encounter a factoring prospect with a tax lien against their company. Usually, the lien is related to delinquent payroll taxes — one of the reasons that factoring companies ask for tax documents in their applications.

Unfortunately, a tax lien usually impacts your ability to get invoice factoring quickly, so we want to explain how tax liens affect factoring arrangements.

What is a lien?

A lien is a security interest over assets used as collateral for a debt. Filing a lien against a company’s assets is a technique that the IRS uses to collect past-due taxes. Because this lien usually encumbers company assets, including accounts receivable (invoices), the lien can prevent you from factoring – unless you get a “workaround” with the IRS (more on this later).

Here is an example

Assume that you want to buy a house and that you seek a mortgage through a bank. Once you buy the house using the mortgage, the bank files a lien on the house, listing it as collateral for the loan. That way, if you sell the house, the bank gets paid first. Similarly, a factoring transaction can be considered as the sale of your invoices to a finance company. If the IRS has a lien that encumbers your invoices, the factor won’t be able to buy your invoices because the IRS is claiming them as collateral for the tax debt — just as the bank claims your house as collateral for the mortgage.

Working around tax problems

Working around this problem is difficult; however, it can be done in some instances. To be able to factor your invoices, you need the IRS to issue a subordination to the factoring company. In other words, the IRS must agree to take a second position on those invoices and let the factoring company have first position.

Why would the IRS issue a subordination? The IRS often considers subordination if you can do three things:

  1. Work out a payment plan with the IRS
  2. Show them how receivables financing benefits your business and INCREASES your chances of satisfying your tax debt
  3. Have the factoring company make payments on your behalf (from factoring advances/rebates)

Although it requires more work, factoring can finance companies with tax problems. The best way to increase your chances of success is to work with a tax professional early in the process.

Get more information

We can provide you with high advances and low factoring rates. Get an instant quote, or to speak with an expert, call (877) 300 3258.

Disclaimer: We are not attorneys and this article should not be considered legal advice. Please consult an attorney or tax professional if you need advice.