Why Payroll Funding Companies Concerned with IRS
Steve Capper/Flexible Funding - August 19, 2020
Before you ever begin funding, finance/factoring/ or payroll funding companies will present you an IRS Internal Revenue service form #8821 for you to sign. (A power of attorney clause in a funding agreement may allow somebody else to sign for you.) The #8821 form is sent to the IRS so that the funding company may track tax issues; if you have a tax liability or a tax lien, the Internal Revenue Service will send your company a notice about it, and the funding company will get cc'd or copied.
For years, funding companies filled out the IRS #8821 forms themselves. In more recent years, most funding companies have outsourced the filing of these forms. It has gotten too technical and the slightest mistake can result in financial losses to the funding company, so specialists have stepped into the market to help. For instance, if one filled out the #8821 form with name of a company called Davis and Smith, but the company name was actually Davis & Smith (with an ampersand between the names) it could result in a situation where the funding company was not notified of a Federal Tax lien. The Internal Revenue Service could end up getting a first-position priority interest in the accounts receivables cash flow of the business, ahead of the funding company.
There are many scenarios that could trigger problems stemming from name confusion that may cause competing parties, including the IRS, to argue over rights to the accounts receivables including:
Commas or hyphens are missing or in the wrong place in public name filings. Holding companies and subsidiaries may not be identified or are improperly identified. Trusts, sovereign nations or the true employer of record arenot identified or improperly identified. A company might have its company entity registered in one name at the State level. And it may be registered at a county level with a fictitious business name or DBA doing-business-as name. (Sometimes the DBA may not be officially registered anywhere but still used as a DBA.) At the same time a company may be going into contracts with their customers using an abbreviated or partial name, or invoicing under some abbreviated or partial name which causes checks to be made payable to the unofficial or shortened name.
Some companies are organized as an LLC, but then switch to the exact same name organized as a corporation, or vice versa. They don't want to create customer confusion so they hide it-- do not make changes on invoices, or do not redo contracts with the customers. Maybe they do make the changes to the invoices, contracts, and bank accounts, etc., but do not inform business partners (such as funding companies and software companies providing web seats) of the changes. This is in clear violation of contracts and can result in immediate cessation of services and/or contests between multiple parties including the IRS. When actual lawsuits start flying, or collection efforts are enforced, the diversity of names can create great confusion.
Examples of real life problems financial companies and staffing agency payroll funding customers have had, or can have, with the Internal Revenue Service include:
- The IRS told a funding company and staffing agency the exact total amount to be paid as of a certain date for a lien to be removed. The funding company paid the full amount and was assured by the IRS officers that the lien would be removed. Five months later, the funding company discovered that a lien was still in place because additional penalties and interest (related to the old taxes) were attached after the payoff.
- An IRS regional division manager absolutely assured a staffing agency that a lien would not be attached to a business. A supervisor at another office then went ahead and filed a lien without warning to anyone.
- A funding company was tracking a staffing company head office for tax liens. The IRS filed the lien at the staffing company branch office, which was not discovered by the funding company until weeks later.
- In some cases, when the accounts receivables are related to Federal contracts/facilities, the IRS can without warning step in and grab accounts receivables.
- The Internal Revenue service 45-day rule provides that forty five days after the filing of a tax lien by the IRS, any additional funding advances automatically become IRS property.
- IRS issues are typically in process for months. Many people don't want to deal with their IRS issues and are not proactive...they always wait for the IRS to contact them in all dealings. Meanwhile, IRS people switch jobs, retire, transfer to other offices, get new supervisors, etc.. which means that new people must come up to speed and may negotiate differently than their predecessors. Although it may be convenient for the staffing company owner, payroll funding companies do not like clouds of unresolved IRS issues hanging overhead.
Regarding any IRS issues the bottom line is, cooperate with your funding company from the very beginning and always. Otherwise, you could have your funding pulled in an instant.