Many factoring companies require tax form 8821 before signing a factoring services agreement. I recently had a factoring prospect applying for factoring services when she became frustrated because the factoring company required tax form 8821. Her thought was “this factoring company seems to want everything!”
The IRS tax form 8821 legally authorizes a factoring company and its employees to obtain tax information directly from the federal government regarding their business client. Factoring companies want the ability to request tax information or automatically receive notifications from the IRS if their client incurs tax problems.
If a tax issue arises, a factoring company can quickly reach out to the client to determine what steps can be taken to resolve the situation. If necessary, they can take immediate precautions to avoid losses should their client become insolvent or unable to meet invoice financing requirements. It’s always in the best interest of both the factoring company and the business client to resolve tax issues responsibly and in a timely manner.
From a legal standpoint, factoring companies want to remain in a first lien position on a client’s accounts receivables. They don’t want another creditor of the client to assume a legal right to the receivables that would preclude them from obtaining those assets, should it become necessary. Other creditors include the federal government. If a client owes past due taxes, then the government can become a first lien holder on the business’s assets.
Some factoring companies use a tax service such as Tax Guard to stay informed of federal tax issues for their clients. These companies may not require form 8821 since the tax service provides the information.
If you’re required to complete the form 8821, then don’t feel that a factoring company is taking advantage of your best interests. It’s common practice for the them to stay informed of your federal tax situation should you have unpaid taxes.