The following question was posted on Trucking With Authority Facebook Group,
"Does anybody know a factoring company that will help our company out? The owner has an IRS tax lien, but has paperwork of an IRS payment plan in place."
First impressions are that the existence of the IRS tax lien will be fatal to this trucking company and prohibit the securing of accounts receivable financing (commercial transactions financing agreement). However, the IRS is more interested in collecting unpaid taxes than putting companies out of business and has procedures for resolving tax lien issues.
The trucking company is seeking a commercial transaction financing agreement (factoring) in order to improve cash flow and insure liquidity and future tax compliance. However, the IRS filed a tax lien against the company prior to granting a monthly repayment (installment) agreement.
The appropriate action is to submit a Form 14434, Application for Certificate of Subordination of the Federal Tax Lien. In this case the factoring company will require the IRS subordinate the tax lien up to the amount of the factoring credit line, while also demanding proof that IRS has approved an installment agreement (Form 433-D) for the delinquent taxes.
What are Commercial Transactions Financing Agreements?
Generally, these are loans to a taxpayer to operate a business. The creditor and the taxpayer, in the course of trade or business, agree that loans to the taxpayer will be secured by taxpayer’s commercial financing security. Security can include, but is not limited to, accounts receivable, mortgages on real property, and inventory.
Process for obtaining a Subordination of Filed Notice of Federal Tax Lien
- Maintain employment tax deposit, tax return filing compliance and the terms of the installment agreement.
- Communicate directly with the factoring agency or lender and advise them of your intentions, for without their cooperation a subordination will not be approved.
- Complete Form 14134 Subordination of NFTL.
- Include correspondence from the lender confirming approval of the commercial transaction financing agreement is contingent on IRS subordinating the tax lien.
- File the Form 14134 with the IRS Revenue Officer that approved the installment agreement or Collection Advisory Group in your area
- Note: It normally takes 30-60 days to obtain a lien subordination
Types of IRS Tax Lien Certificates
Internal Revenue Code (IRC) § 6323 provides for the filing of a Notice of Federal Tax Lien (NFTL). The IRC also provides for the issuance of other certificates for the administration of the lien, including:
- Release of lien (IRC § 6325(a)) - Form 668-Z, Release of Filed Notice of Federal Tax Lien
- Withdrawal of lien (IRC § 6323(j)) - Form 12277, Application for Withdrawal of Filed Notice of Federal Tax Lien
- Subordination of lien (IRC § 6325(d)) - Form 14134, Application for Certificate of Subordination of Federal Tax Lien
- Discharge of lien (IRC § 6325(b)) - Form 14135, Application for Certificate of Discharge of Property from Federal Tax Lien
Release of Notice of Federal Tax Lien
The filed Notice of Federal Tax Lien is self-releasing upon satisfaction of the underlying tax liability. IRC § 6325(a) requires the issuance of a release of federal tax lien within thirty (30) calendar days of the date on which:
- The liability is satisfied;
- The liability becomes legally unenforceable; or
- A bond is accepted.
Withdrawal of Notice of Federal Tax Lien
Internal Revenue Code (IRC) § 6323(j) gives the Service the authority to withdraw a Notice of Federal Tax Lien (NFTL) under certain circumstances, and to provide notice of the withdrawal to credit agencies under the following conditions:
- the filing of the notice was premature or otherwise not in accordance with the Service's administrative procedures ( IRC § 6323(j)(1)(A));
- the taxpayer entered into an agreement under IRC § 6159 to satisfy the tax liability for which the lien was imposed by means of installment payments, unless such agreement provides otherwise (IRC § 6323(j)(1)(B));
- withdrawal of such notice will facilitate the collection of the tax liability (IRC § 6323(j)(1)(C)); or
- with the consent of the taxpayer or the National Taxpayer Advocate, the withdrawal of such notice would be in the best interest of the taxpayer (as determined by the National Taxpayer Advocate) and the United States (IRC § 6323(j)(1)(D)).
Subordination of Notice of Federal Tax Lien
- Subordination is the act or process by which one person’s rights or claims are moved voluntarily to a position ranked below those of other claimants. This differs from the principle of subrogation (discussed in IRM 220.127.116.11.1.17), in which a creditor moves ahead of another claimant by operation of law. Under IRC § 6325(d),the Service may issue certificates subordinating a tax lien to another interest if:
- payment is received in an amount equal to the amount with respect to which the tax lien is subordinated , or
- the Service believes that the subordination of the tax lien to another interest will ultimately result in an increase in the amount realized by the United States from the property subject to the lien and will aid in the collection of the tax liability.
- Subordination provides the Service with flexibility. In subordination by payment, the tax lien is being subordinated only to the extent the United States receives, on a dollar-for-dollar basis, an equivalent amount. The Government’s interest cannot be injured and a new procedure for collecting taxes is made available.
Discharge of Notice of Federal Tax Lien in Nonjudicial Sale
- Most controversies involving the priority of the federal tax lien involve nonjudicial sales, which are sales made pursuant to one of the following:
- An instrument creating a lien on the property sold;
- A confession of judgment on the obligation secured by an instrument creating a lien on the property sold; or
- A statutory lien on the property sold.
- Nonjudicial sales include the divestment of a taxpayer’s interest in property by operation of law, by public or private sale, by forfeiture, or by termination under provisions contained in a contract for deed, land sale contract, or conditional sales contract. Treas. Reg. § 301.7425-2(a). The key point is that a court action is not needed to enforce the creditor's interest and to sell the property.
Questions? Contact Mark W. Sullivan, EA
This article was written by Mark W. Sullivan, EA, Tax Counsel to Per Diem Plus, LLC and Of Counsel to Schroeder & Associates and leads the highly specialized Tax Controversy Group. His practice is concentrated in the areas of Federal tax controversies and litigation support/expert witness services in tax and other white collar cases. He also advises on tax planning and consulting for businesses and individuals. Mark has 25 years of experience in Federal Collection, Examination and Appeals representation.
Prior to starting a private practice in 1998, Mark was an Internal Revenue Officer with the New York, NY, Saint Louis, MO and Washington, D.C. offices of the Internal Revenue Service
- Internal Revenue Service – Collections, Examination and Appeals Divisions (1998)
- United States District Court for the Eastern District of Missouri – Expert Witness
- United States District Court for the Southern District of Illinois – Expert Witness
- United States District Court for the District of Hawaii – Expert Witness
- Federal Public Defender (E.D. of Missouri) – Consulting Expert