IRS Form 8821, Tax Information Authorization, lets a taxpayer allow a named person or company to inspect or receive its confidential tax information for the tax types and periods listed. It does not let that party represent the taxpayer before the IRS; that requires a different form (Form 2848).
How it works in factoring
Many factors ask new clients to sign Form 8821 during due diligence, and sometimes keep it in place during the relationship. The main reason is unpaid federal taxes, especially payroll taxes.
When a business owes federal taxes and the IRS files a notice of federal tax lien, that lien can attach to the business's property, including receivables. Federal law gives certain protections to commercial financing that predates the lien filing, but those protections are limited in scope and time. A factor that buys receivables while a client is building up an unpaid tax balance can find its collateral competing with the IRS.
With an 8821 on file, the factor can confirm whether:
- Required returns have been filed
- Payroll tax deposits are current
- There are balances due or installment agreements
What to check
- Which tax types and years the form covers
- Whether the authorization is limited to the factoring relationship and how to revoke it
- Who at the factor will see the information
If you have a tax balance, it is usually better to disclose it up front along with any payment plan than to have it surface during the factor's check.