45-Day Rule for Federal Tax Liens - Lien Solutions

45-Day Rule for Federal Tax Liens

We have discussed why you should care about staying alerted to federal tax liens, and we mentioned the 45-day time limit lenders are faced with in the unlucky (but somewhat likely) instance of the IRS placing a federal tax lien on one of your clients. You’ve probably heard of the 45-day rule before—but how well do you understand it? Let’s look at an example scenario.

We have discussed why you should care about staying alerted to federal tax liens, and we mentioned the 45-day time limit lenders are faced with in the unlucky (but somewhat likely) instance of the IRS placing a federal tax lien on one of your clients. You’ve probably heard of the 45-day rule before—but how well do you understand it? Let’s look at an example scenario.

The Internal Revenue Code (IRC) provides for certain situations in which a lender may retain priority over a federal tax lien, where the federal tax lien was filed after the lender entered into a security agreement with the borrower. Can you recognize which of the four loans described below allow for the lender to retain first position over the IRS?

Facts

  • ABC Factor enters into a security agreement with XYZ Retailer, with the debtor’s accounts receivable secured as collateral. The UCC is filed on January 15, 2012. ABC makes a loan of $15,000 on that date.
  • The IRS files a federal tax lien on XYZ Retailer on February 6, 2012.
  • On March 3, 2012, ABC Factor makes a loan of $5,000 to XYZ Retailer. ABC has no knowledge on this date of the aforementioned federal tax lien.
  • On March 4, 2012, ABC Factor learns of the federal tax lien.
  • On March 5, 2012, ABC Factor loans XYZ Retailer $2,000.
  • On May 31, 2012, ABC Factor loans XYZ Retailer $1,000.

So, quiz time. Who has priority on a) the $15k loan; b) the $5k loan; c) the $2k loan; and d) the $1k loan? Answers below:

  • The loan made on January 15, 2012 for $15,000 has priority over the federal tax lien. The agreement was entered into and the loan was made before the federal tax lien was filed.
  • The loan made on March 3, 2012 for $5,000 has priority over the federal tax lien. It is in compliance with the IRC Section 6323(c)(2) because lender and borrower entered into the loan in the ordinary course of businesses; the agreement was entered into before the federal tax lien was filed; at the time of the loan, the lender had not received knowledge of the existence of the federal tax lien; and the loan was made within 45 days of the filing of the federal tax lien.
  • The federal tax lien has priority over the loan made on March 5, 2012 for $2,000, because the bank had actual knowledge of the existence of the federal tax lien at the time it made the loan. Because of this knowledge, the 45-day time limit does not apply. ABC should not have extended credit to XYZ after learning of existence of the federal tax lien.
  • The federal tax lien has priority over the loan made on May 31, 2012 for $1,000, because the bank had actual knowledge of the existence of the federal tax lien, and the loan was made after the 45th day of the filing of the federal tax lien.
  • Note also (and this is important!) that in the above scenario, if ABC Factor never learned of the existence of the federal tax lien, any loans made to XYZ after the 45th day following the federal tax lien would still have been second in priority to the IRS. As we mentioned in our previous post, the onus is on the lender to be aware of federal tax liens, whatever it takes.

So what does it take to stay aware? Read on.

Implications to Due Diligence Best Practices

It is recommended that you search for federal tax liens before issuing any new credit (including new loans in revolving lines of credit) to any borrower, especially those of high-risk. Practically speaking, this is often best achieved by setting a recurring search schedule of, for example, every 30 or 60 days.

Because lenders must discontinue all new funding immediately upon becoming aware of the federal tax lien, you’ll want to use a carefully managed process for conducting these searches and reviewing their findings. Choose a service provider such as Lien Solutions that provides you with clear, concise search results that direct your attention precisely and with immediacy to the presence of any existing federal tax liens, so that you can take immediate action.