Tax Lien Workarounds and Anomalies
Written by: Jason M. Medley Esq., Partner, Spencer Fane LLP
“Screw the government!” – Anthony Hopkins’ character on Legends of the Fall (I applaud his bravery, when he decides to continue bootlegging, but then a bunch of characters subsequently get killed).
You can take Anthony Hopkins’ position, but you might lose your money in doing so. Most factors are well aware of the 45-day rule for IRS liens. See 26 U.S.C. §§6321, and 6323(a) and (f), and 6323(c)(2). As a reminder, an IRS lien will prime a previously filed UCC1 lien (i.e., your lien) on the earlier of the 45th day after which it was filed, or after the secured creditor becomes aware of it. As many of you use a tax service, you are often made aware of the IRS lien shortly after it is filed (and actually, you were probably made aware that the IRS lien was imminent, because your monitoring service notified you that taxes were past due). Knowledge is power, but in this instance it also imparts additional responsibility. Once you become aware of the IRS lien filing, it primes you as to accounts you purchase thereafter. How the IRS might or might know that you were “aware” of their lien is another matter, but I would not advise you to tempt fate.
What do you do when you learn that an IRS lien is likely to be filed? Although the 45-day rule has not kicked in yet, the mere fact that tax filings or tax payments are delinquent is of course a red flag. Good practice dictates that you communicate your awareness to your factoring customer and obtain consent to communicate with their accountant, so that you can verify that the problem is at least being addressed and so that you can be kept in the loop as the situation gets remedied (hopefully). Regardless, initiating a reserve holdback is wise, although that is easy for me to say, and not always economically feasible for the factoring customer that needs as much from each advance as possible. But in fact, you may have to do exactly that. Many factors, once they are notified of the IRS lien (or after the 45th day from its filing date, whichever came first), will build up or retain a reserve equal to the amount of the tax liability. If you choose to do this as opposed to ceasing the purchase of new accounts, be mindful that the tax lien is not necessarily dollar specific. Although some tax lien filings will reflect a dollar amount, the lien attaches to assets to secure the current tax liability as well as associated penalties and interest, which can continue to climb. When title companies allow you to bond around an M&M lien, they are usually requiring the bond to equal 1.5 times the amount of the lien. In similar fashion, if you take the reasonable risk of reserving against the IRS lien, be certain to reserve a certain amount above the then-current tax liability. Obtaining the execution of IRS Form 8821 allows you or your tax monitoring service to access the IRS transcripts to verify the dollar amount with more specificity. Nonetheless, factors reserving against IRS liens should be mindful that the reserves could become insufficient. You also may need the reserves to offset bad invoices, so this cuts into your collateral position.
Purchasing new accounts after the date that the IRS lien primes you means that you are purchasing these accounts subject to the IRS lien. If you find yourself in that situation, encourage your clients to retain a tax professional to negotiate with the IRS and enter into an offer in compromise, allowing for a payment plan (and even a subordination as to your lien), so that your reserves can build back up. Knowing that you have reserves and/or are continuing to finance the taxpayer usually (I use that word loosely, as there is no rhyme or reason to some of the actions I have seen the IRS take) incentivizes the IRS to work out a favorable deal.
One strong word of caution: if you are funding payroll (or are aware that your purchase of invoices is “for payroll” or you are funding directly into a “payroll account” or a PEO designated account), be mindful that your awareness of the failure of the factoring customer to pay 941’s may subject you to liability. See 26 U.S.C. §3505(b), and 26 U.S.C. §6323(i)(1). Your reserves may not be sufficient to mitigate around this potential problem. You can monitor payables, including tax payments, but you should not casually fund money directly to the IRS on behalf of your client in my humble opinion (unless it is a one-off and is pursuant to an offer in compromise or as part of a negotiated subordination agreement with the IRS).
In my practice, I have noticed a few anomalies with respect to IRS liens that you too may have experienced. For one, I have noticed that the IRS transcript may indicate that a lien has been filed, but when you search the UCC records, you cannot find it. First, it would not be the first time that the IRS has filed a lien and listed the Debtor’s name incorrectly. The IRS employs humans just like the rest of us, and until we invent robotic IRS agents (it’s coming soon, by the way), the IRS is subject to human error just like any other organization. In fact, I found humor in the irony that thousands of IRS agents are themselves past due on their taxes. [1] The most common error I have seen is that the IRS, as well as certain state agencies, such as state employment commissions and state labor departments, will file liens in the state where the business is being conducted, as opposed to the state where the taxpayer/debtor is actually incorporated. While I encourage duplicate filings in the state where the Debtor does business, the UCC1 (even for the IRS) should be filed in the state where the Debtor is organized. To remedy this, run a nationwide lien search with your database provider (you may also discover unpaid wage liens filed by a particular state labor agency, but filed in their home state as opposed to the Debtor’s home state; good practice dictates that you treat those as having been properly filed regardless). Also, there may be a latency issue. Most states have e-recording procedures that provide for instant electronic recording of UCC1’s, but the databases still have latency and so UCC1 filings may not be reported in real-time, and once you discover it, it relates back to its filing date and not the date it became discoverable by a search of the public records. Therefore, a lien could be filed on a particular day, but not retrievable or discoverable by the applicable lien search database for a week or more. To remedy this, start by searching the secretary of state’s database directly, as opposed to just using your due diligence software system, and then use your software provider to run a nationwide search. I have advised in the past that you should conduct a due diligence “family reunion” about every 6 months (because of the 45 day rule and the 4 month rule for amending UCC’s when there is a name change or situs change by the Debtor; I say 6 months because I understand it may be impractical to do it every 45 days or 4 months; use of a monitoring service is wise, as they will alert you as to new activities regarding your customer’s liens).
Nonetheless, if you so much as suspect an IRS lien has been filed, protocol would dictate that you treat it as an actual lien, for good measure. There is some statutory support for the position that an IRS lien may be filed in the state where the taxpayer conducts business and generates taxable revenue, and that they last 10 years (as opposed to the 5 year limit on UCC1 filings), and that the Debtor’s name need not be 100% accurate (I have seen IRS liens filed using the trade name, or the truncated name that the factoring customer uses on its tax returns). See e.g. Crestmark Bank v. United States (In re Spearing Tool & Manufacturing Co.), 292 B.R. 579, 582 (Bankr. E.D. Mich.), rev’d, 302 B.R. 351 (E.D. Mich. 2003), rev’d, 412 F.3d 353 (6th Cir. 2005). In other words, forgiveness is often extended to the IRS more so than to commercial financiers. To mitigate risks, consider such loose liens as being valid; they are “close enough for government work”. [2]
There are workarounds when it comes to an IRS lien, but it has risks that you need to be aware of, as discussed above. Most factors are not afraid to continue funding in the face of an IRS lien, but it helps to be mindful that the lien amount can increase later and relate back to the filing date. It also helps to know that the lien’s priming ability may come sooner than the 45th day, and even if you cannot verify the lien filing itself (because it was filed in the “wrong” state or used the “wrong” version of the Debtor’s name), it may nonetheless exist and your mere awareness of it via the IRS transcript may trigger that critical date. Always err on the side of caution, but do not be afraid to employ the mitigation strategies expressed above, as long as you understand the risks.
“Nothing is certain, except death and taxes.” – Benjamin Franklin
“And we all try to avoid both.” – Jason Medley
[1] “Senator Joni Ernst wants IRS workers, contractors to pay back up to $46M in taxes they owe.” New York Post, March 25, 2025.
[2] This phrase actually used to imply a high, exacting standard of work, during WWII. I take it to mean that if the government comes close to complying with applicable lien filing statutes, they are close enough.
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