Missing Tax Returns Can Be a Red Flag for Lenders
Missing tax returns usually means trouble, and it’s a safe bet that they weren’t all lost in the mail.
Even experienced loan underwriters can overlook the significance of a missing tax return. By itself, a public records check showing that a business has no tax liens won’t keep your collateral safe but can help.
A missing tax return is usually a noncompliance issue. One missing tax return can mean other missing tax returns. Multiple missing tax returns can mean a tax liability. It happens easily enough. A business owner misses a tax deposit and falls behind. An apparent solution is to avoid filing a tax return so the IRS won’t know about the missed deposits. The business owner tries to catch up but falls even farther behind. In a worst-case scenario, there can be years of unfiled returns.
Business owners who try to manage the situation are quickly overwhelmed. Some taxpayers feel so frustrated and hopeless that they stop making payments.
Failing to file a tax return will not protect you from the IRS. They will simply make an assessment on your behalf, and it will be fully and completely enforceable.
Too often, lenders miss this important red flag. They decide there is no tax liability and fund the borrower. When the liability comes to light, collateral can be seized by a wrongful IRS levy. Missing returns should always be viewed as suspicious and thoroughly investigated at once.
Monitoring for missing returns is most effective when paired with tax deposit compliance monitoring. Even if tax deposits exist, you should still ensure that payments are made on time and that the account is in good standing. Ongoing tax deposit compliance monitoring can alert you to potential threats in advance and thereby protect your collateral.
Take a closer look at any missing returns before assessing risk. Underwriters, typically focused on lien detection and liabilities, can help to prevent losses by keeping a seasoned eye out for potential risks.
Have questions? Speak to an expert for more information.