Sean Murray: Well, hello, everybody. My name is Sean
Murray. I'm the president and chief editor of deBanked. And I
am here with Hansen Rada, the CEO of Tax Guard. How you doing?
Hansen Rada: Well, thank you. Thanks for having me.
Sean Murray: No problem. Can you tell me a little bit about Tax
Guard and the history of the company?
Hansen Rada: Yeah, it's, it's an interesting history, we started
back in the Great Recession back in 2009. And I own another and
co-founded another business that helps small businesses and
individuals that have tax liabilities with state or the
federal government. And at the time, that company has been
around for about 23 years, we represented about 7,000
companies that owed money to the IRS. So they came in our doors
saying, "we have a problem, tax liens been filed, help us
resolve it." And I started to talk to these small businesses
and realized something really kind of fascinating that all of
them were able to get loans, they were able to go to banks,
non-bank financers. And they were able to get financing. And
I kept scratching my head saying, "Well, how is it that
you can get a loan when you have this huge tax liability?" And
they would look at me and say, "because they don't know." And I
was like, "wait a minute, what do you mean, they don't know?"
And so through the years of my working with the collection
division of the IRS, I realized that there was this real
disconnect between if you owe money to the federal government,
whether the federal government actually ever files a tax lien
or not. And so if businesses are just looking to the public
record, you know, lien searches, credit reports, trying to
identify tax problems based on the federal government filing a
tax lien, well, they're going to be out of luck. Because the
reality is the IRS can levy bank accounts, seize bank accounts,
and take collection action against these businesses,
whether they file a lien or not. It just doesn't matter. So I
started putting my head to it, talking to a bunch of companies
and realized that, you know, if I could create some sort of
report that created a level of transparent playing field, where
the lenders would know in real time, whether that business owes
money to the government or not, somebody would pay me money for
it. And so that's how we started Tax Guard. Because I want to
emphasize, you know, having a tax liability, it's a cash flow
problem, right? I mean, it's I don't have enough money, I have
to pay my rent, or I don't have a place to work, I have to pay
my employees, they don't show up. But if I don't pay the
federal government the taxes, in other words, I pay my payroll,
but I don't hand that money over, that's due at that time to
the IRS, nobody knows. It's the easiest loan to get. I just
don't write the check. And so what happens is it becomes a
lender-first resort, and you create these off balance sheet
liabilities. So the tax liability is not the disease,
right? It's a symptom of the disease, the disease is
cashflow. And that's what ends up killing the business. So if
you have insight into whether a business is paying their taxes
or not, you'll know whether they have the cash flow to have a
sustainable business.
Sean Murray: So when they come to you, what kind of information
are they able to get that they otherwise couldn't get from a
public record?
Hansen Rada: Sure. So in a public record, in a true sense,
you would get if a lien has been filed. So I think it's Experian
did a report a couple years ago and showed that on average, it
takes the Internal Revenue Service to file a tax lien about
18 months on a business and about 26 months on an
individual, you know, credit reports, for example, no longer
covering tax liens for individuals. A few of the SEC
Attorney General's for different states sued, because there were
a lot of false positives, you know, lien would get filed in
New York City for John Smith and ends up on John Smith's credit
report and John Smith's like "it's not me, and you've just
hurt my credit." So they had to eliminate that. So a lot of the
credit bureaus are not covering tax liens anymore. So you're
really looking to like UCC searches or public record
searches at the county level to see if liens have been filed.
But the stat that stands out is that in 2010, Internal Revenue
Service filed about 1.3 million tax liens in the United States.
Last year, they filed about 427,000. So it's a drop about
56%. However, the number of individuals and businesses that
owe money to the government has gone up 36% since that time, so
there's a real disconnect. But it kind of makes sense because
if you're in the IRS issues, you can do a simple study and they
have if you Google it, you can find it. And if we don't file
tax liens, people's credit scores go up. If people's credit
scores go up, they can get a loan. If they can get a loan,
they can pay us back. And they've actually seen by
decreasing the number of federal tax liens being filed, their
collection activity has increased. And so what they've
done is they've pushed the risk off onto the private sector. And
so then the information we provide is in real time, if
there is a liability or dollars owed to the Internal Revenue
Service, the date of our report, and the primary, I would say
thrust of that is around 941 Taxes. And what that means is
employee withholding taxes. So, I've payroll on Friday, I'm
paying somebody $10 an hour, I give them $7, I have to give $3
that day to the government. It's due. And if I don't pay it,
penalties and interest begin to accrue. So if I pay $2, because
I was short, $1. Again, nobody really knows it happened. But
yet I started accruing a liability and penalties and
interest start to grow on that. And eventually, one day the IRS
gets around to collections. So we give our customers insight
into what is the true financial status of that business at that
point in time? Do they owe money to the government? We also allow
them to monitor payroll deposits, you know, prime
example of what we're going through right now with COVID.
You know, a lot of inquiries we're getting from our
customers, is, "I have a company, ABC trucking, they were
good in January. What are they today? And what will they be in
six months, so we can monitor that status of that business and
ongoing relationship." So if you're originating a credit, or
if you're selling to that credit, again, later down the
road, and the impact of COVID has been pretty pronounced.
We're seeing right now across the board about a 10% drop in
941 tax payments and deposits. So what that means is that
companies are laying off employees, or they're in a
cashflow crunch, they're not laying those employees off.
They're just taking that money and having to use it for other
things that are necessities right now.
Sean Murray: You know, you mentioned the off balance sheet
liability, and that the IRS will eventually come in to collect.
So what is like the risk for the lender? If and when the IRS
comes knocking? Are they are they at risk with their own
loan?
Hansen Rada: Well, there's a few nuances that it really depends
on but I think if you're thinking about non bank
financing, the focus that I would have is, is the liability
they owe the government the day you originate, that credit,
large enough, or they don't have the cash flow to satisfy it.
Because usually what happens is I accrue tax liability. This is
getting a little bit inside baseball here. But the
government in order to levy in order to issue a seizure of bank
account or seizure of account receivable, which is really what
a non bank lender is going to concerned about, right? Do they
have the ability to pay me back over time, and the government
goes into that only if they file the form 1058, file Notice of
Intent to Levy. So we pick that up on our report, and the moment
that notice is issued 30 days from that date, then the
government has permission to levy bank accounts, whether a
tax lien has been filed or not. So if I were looking at a
report, the tax card generates, I would say, Okay, this company
has $50,000, but is the government in a position to
actually take that money? Well, you would see if that 1058 has
been issued. And if it hasn't been issued, you know, you have
time, but if it has been issued, and specifically, if it's in the
past, there's 30 days have passed. I know that really is
just our customers a moving target. It could happen today.
It could happen tomorrow could happen the next week. But the
government can issue a levy seizing bank accounts, seizing
account receivables, whether a lien has been filed or not. Now,
if a lien hasn't been filed, and I want to preference that for
the real technocrats out there, if a lien has not been filed
publicly, even though they can seize account receivables,
right, they don't have the rights to them. So it's what we
call an incorrect levy. And it's just a battle with the
government to get the money back. You can imagine they shoot
first and ask questions later, right? They issue the levy to a
third party, the third party thinks "well, this is the
government sending it to me, I'm just going to send the money to
the IRS." And now the lender has to go to the IRS and say, "Look,
if you didn't have the lien filed, technically, that's my
money. I need you to ship it back" and it's just an uphill
battle.
Sean Murray: So speaking of liens not being filed, let's
talk about the current economic situation. Obviously, a lot has
transpired. Do you think there's going to be a lot of more a lot
more hidden tax liabilities quitted as a result of the
current environment?
Hansen Rada: Absolutely. Without a doubt. I mean, you have to
imagine that number one, as I mentioned before, just when we
look at payroll deposits from January versus April, so the
first quarter, first month versus the first month, the
second quarter, we're already seeing a drastic drop in
deposits. Now, it could be that some of that just layoffs are
occurring. But it also could be when you again, you have a cash
flow crunch, you're going to take care of the squeaky wheel
first. You know, the vendor says I need to get paid, rent says I
need to get paid, or let's be candid, employees say look, "if
you're not paying me I'm not going to show up." So you take
that money and you satisfy the squeaky wheel first, inevitably
knowing and to some extent it's the government's fault, right?
Like if if we had a system where you miss that deposit, and a
letter went out 30 days later, and then a 30 days later, you
got a phone call. People would probably be more trained to say
I need to satisfy that because the IRS is calling me. Reality
is that's not what happens. You may not hear from them for three
quarters, maybe a year. And so you immediately think to
yourself, "well, do I go through the trouble of getting a loan?
Or do I just not pay this knowing I'll make it
[inaudible]?" which is inevitably the lender-first
resort. So I think absolutely, we're going to see an increase
in tax liabilities. And it's just what happens in any you
know, we saw this same thing happen during the Great
Recession, right businesses, the income starts to drop, they're
reluctant to let people go, they've got fixed assets they
have to pay for, and they have to find that money somewhere.
And the fastest way to do it is just not make that deposit to
the IRS.
Sean Murray: Sure, I think you threw out a stat before about a
decrease in IRS tax liens being filed. But do you think there
will be an even greater hesitation by the IRS now to
timely file tax liens in light of what has happened? Are they
going to kind of hold off and those tax liabilities aren't
going to be known more so than before?
Hansen Rada: Yeah, I do. I mean, it just as you've seen them push
off filing dates, you're gonna see them delay tax lien filings.
But that's not necessarily a good thing, right? Because lien
is just public notice, the lien is just saying to everybody,
hey, this person owes money. And it's a manual process still,
right? Somebody has to review it at the IRS, the IRS has been
defunded every single year for the last 10 years, they have
less people doing it. So there's a direct correlation to money
being paid, you know, funding for the IRS and lien filings,
but they're even going to push it out more, because they're
going to want people's credits to stay higher. Because if their
credit score stays higher than people can get loans, and
eventually, maybe the government can get paid back. But if you
think about risk, risk is created not when the tax lien is
filed, risk is created when the borrower fails to make that
deposit, or the borrower fails to file that tax return. And
that's when the risk is created. You know, in the point of Tax
Guard's report is to show you that in real time. So while
yeah, I do agree, lien filings are going to probably continue
to go down and they're going to push that off, it doesn't mean
collections is going to go down. And that's really what lenders
need to be worried about. If my customer or my borrower or my
credit owes money, what's the risk to me getting paid back?
What's the risk to their cash flow? That's the main focus. So
the lien? And I know it's something that's been going on
for 50 years in banking that like, the lien is so important,
the lien, a lien is becoming irrelevant? It's do you owe
money? Are you deficient with your tax deposits? Do you have a
cash flow problem? That's in what is the risk to me getting
paid back? That's the question that should be asked.
Sean Murray: Okay, so is there another side to it, they could
slow play the filing of the lien. But given now that we're
in a situation where national deficits are at an all time
high, right, we're practically doubling it at this point, could
the IRS actually become more aggressive with collection to
try and reduce that deficit?
Hansen Rada: Yeah, if you look at the amount of money that
should have been paid to the IRS, in other words, returns
have been filed, but the money was short, they're already
running right now at about a $350 billion deficit. That's the
amount of money that should have been paid to the IRS and has not
been. So they have a very large deficit to begin with. The other
thing, it's more of a philosophical thing to consider
is that when you have a business that's accruing tax liabilities,
and it's not making its payroll tax deposits, you know, the IRS
will argue that that's an unfair advantage, right? You have a
business over here, A, who's paying their payroll tax
deposit, and they have $100 left over every month to go out and
expand through cap-x or op-x. And then you have this other
business that has $20,000 every month, because it's not making
tax deposits. Is that fair? You know, are they continuing to
accrue taxes? So what we commonly see is, it really is
unfortunately hit or miss between who the IRS goes after
and who they don't. I mean, we have businesses that we work
with it, owe 15 grand that get levied, and we have businesses
over $1.5 million and never hear from the IRS. So I wish there
was a blanket statement say, here's the true and try method.
It is random. But the reality is, is that the government will
basically-- so we go back a little bit. It used to be 10
years ago, when I started doing this, the IRS would seize assets
and they would put, for example, shut down a restaurant and paste
their tax returns all over the front window, in a sense, trying
to shame people into you need to pay your taxes. Well, they got a
black eye, because everybody would go to their senator or
their representative. And nothing, you know, unites
Democrats and Republicans better than the hatred for the IRS. And
they would yell and scream and say you can't do this. So the
IRS took a different tact, which is they strangle that business
at night. And what I mean by that is if they slowly choke off
the cash flow, eventually one day the business just goes under
and so they take the assets to account receivables, they take
the bank accounts, they can't make payroll. One day that
Subway or some other restaurant goes out of business. Everybody
says "Well, I guess they couldn't make it." But if you
had known that two years ago, they stopped paying their
payroll taxes, the lender would have seen there was a cash flow
starting. So it's kind of a roundabout explanation. But
collections doesn't stop. Right, the government will continue to
fund the machine. And they will continue to try to level the
playing field in terms of businesses who pay their taxes,
and they don't. They just won't do it publicly.
Sean Murray: Sure. So one of the takeaways I, I've gotten from
conversations with alternative lenders and commercial lenders
is that there's going to be a little bit of an adjustment
period in how they approach underwriting and analysis, there
was this big rush towards algorithms and big data to
automate that. And there seems to be a shift towards more
personalized underwriting. And I think lending companies and
funding companies are going to be looking to certain data
points to guide how they move forward. How important you think
one's standing with the IRS is going to be in the near future?
Is it going to play like a more important role? Just because of
all, all that we talked about today? Do you think that's going
to be something that they really need to keep an eye on?
Hansen Rada: Yeah, it's a great question, Sean. Um, it's
difficult to say whether it'll be more important, but I think
it's always been important. What you see often in crisis is
people go back to the basics, right? They, they go back to
traditional underwriting, it's, it's, it's it's flashy and it's
interesting when credit losses are so low to say we use, you
know, Facebook posts or likes or we do this, we do that. And the
reality is when you get down to basic underwriting is, are you
going to pay me back? Right? And so, in that equation is, are you
going to pay me back? It's who else do you owe money to? And if
you don't understand, and I mean, the lender doesn't
understand whether the business owes money to the IRS or not,
you got a big hole in that equation. And so I would just
make the argument that I think it's always been a critical
piece. I will say, for a long time, it was overlooked, because
they didn't realize you could get that information. I mean, up
until and knock on wood, but up until we started this business,
you know, nobody had insight into real time tax liabilities,
t was just wait till the overnment files the lien. And n
w you can see it when it h ppens in real time. Did they m
ke the deposit last Friday? Or d they owe money or not? B
cause again, tax liability is n t the disease. It's a symptom of
the disease, the disease is cash flow. So I think you're going to
see many lenders go back to the basics. Does the borrower or the
credit have the ability to pay me back and this is just one
piece of the puzzle.