Factoring Paperwork: Why do you need my tax returns?

By now, you are likely certain of two things: it is time for spring (goodbye, February!), and you are now a pro at factoring paperwork. While we share your seasonal sentiments, today we will wrap up our factoring paperwork series with a discussion about everyone’s favorite documents: tax returns.

Why does my factoring company need to see tax returns?

Like the other financial paperwork your factoring company may request, such as current aging reports, your prior-year tax returns help the factor get acquainted with your company and its financial health. Your tax returns verify your previous income level and are proof of the tax obligations you have fulfilled – both filing and payment.

Your tax returns will also indicate to the factor whether you have ongoing balances due to the IRS or whether you have an installment agreement in place. As we explained about the Tax Information Authorization, factors are very interested in your tax liability because the IRS’ right to levy on your assets supersedes any prior contract or UCC filing if your account should reach that point.

Of course, the absence of tax returns is also important to the factoring company. The IRS penalizes businesses for the failure to file their taxes on time, and in the case of your estimated tax payments (required for corporations that owe $500 or more and sole proprietors that owe $1,000 or more in a tax year) will issue an additional penalty for failing to pay those estimated taxes on time.

Typically, your factoring company will request two years of annual tax returns and the last year of quarterly payroll tax filings, as well as proof of payment. Though you should have copies of these documents on file in your office or with your tax preparer, you can request copies of this paperwork directly from the IRS. There may be a fee, however, and it may take longer for your factor to receive the returns.

When you are assembling the documents you need to begin a factoring relationship, make sure your tax returns are on the top of the pile.

Now that you are fully prepared to tackle any factoring paperwork, contact Factor Finders to speak with an expert in your industry and start the factoring process today!