Authored by Phil Cohen
Picture this: you’ve received a document package from your invoice factoring company. You flip through the factoring paperwork, making note of the factoring agreement and the guarantee (both of which are familiar to you because you read our blog), and then you come to an IRS form: the tax information authorization.
What am I authorizing with a Tax Information Authorization?
The Tax Information Authorization, or 8821, gives the designee access to your tax information and correspondence for the tax periods and types listed. Signing an 8821 with the factoring company as the appointee authorizes the IRS to send copies of their correspondence with you to the factor. The factor can then be aware of your current tax situation including overpayments or underpayments, failure to file necessary returns, and any potential tax liens or pending intents to levy.
The types of taxes covered in your 8821 will be listed in box 3 of the form:
The columns in box 3 will be filled in as follows:
a) Type of tax – For an incorporated business, the authorization will include every type of tax associated with your business including unemployment, withholding, and income. These classifications will also include associated civil penalties, which the IRS may assess for a number of reasons.
If you are a sole proprietor and operate using your social security number, the factor will likely request your personal income tax information as well.
b) Tax form number – The 8821 will include all form numbers that correspond to the types of tax listed in box a.
c) Year(s) or Period(s) – The factor may request prior-year tax information for due diligence purposes and is authorized to request future tax information for up to three years after the tax period in which the 8821 is issued. The request may be for full years or specific periods (i.e. 2009-2013 or 2nd 2010-1st 2014).
d) Specific Tax Matters – This column restricts the type of tax information shared to matters that are relevant to your factoring relationship. This may include the status of your account with the IRS, balances due, and transcripts of returns or transactions. If this column is blank it means that the factor is authorized to view all tax information.
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Why does the factoring company need my tax information?
Your factoring company requests your tax information for a number of reasons relating to the different steps in establishing and maintaining the factoring relationship. Reviewing your current taxes allows the factor to determine whether you are subject to an IRS tax levy due to failures to file or pay your business taxes.
An IRS lien is not an immediate bar to factoring; however, it extends the approval process: a factor’s willingness to accept the risk of purchasing your invoices depends in part on their ability to recover defaulted payments, but an IRS lien immediately assumes “first position” in claims to your assets. If you do have a lien or intent to levy pending, the factor will work with you and the IRS to establish an installment agreement in hopes that the IRS will subordinate their position to the factor.
Your tax situation will continue to be of interest to your factor once your factoring relationship has begun, for the same reasons. The factoring company may actively or passively monitor ongoing tax situations to identify potential complications and get ahead of any future liens.
Returning the 8821
When you receive your 8821 it should be complete and ready for your signature. Check your company address, telephone number, and taxpayer identification number at the top of the form. If any of this information is incorrect, or you did not previously provide it to the factor, be sure to correct it on the form. This is a great time to confirm or update your business address with the IRS as well, because if the address on the 8821 does not match the IRS’ records then it will be rejected.
Sign and date the tax information authorization and return it by email or fax to the factor. As with any other legal document, ask your factor if you have any questions or concerns about the information they are requesting. Even with an 8821 in place you will still receive correspondence from the IRS about your account. When you do, be sure to address any issues promptly with your factor. Your factor can help you facilitate an installment agreement or other resolution with the IRS to prevent further complications or adverse action on your account.
Contact Factor Finders to learn more about invoice factoring and the due diligence process. We will connect you with one of our expert account managers who can guide you through the necessary factoring paperwork and set up a factoring program that works for you.