Hansen Rada has worked with the IRS for 25 years and uses this knowledge to help financial companies make better lending decisions.
Rada is the CEO of tax guardwhich gives lenders proactive insight into hidden tax risks before someone files liens.
At 23, Rada started a business that helped small businesses with payroll taxes. Some companies don’t always have the cash to immediately fund their liabilities to employees, suppliers and the government for many different reasons. And the government is usually paid last.
Rada has seen that there is no record of these obligations, at least not when a lender decides on a request for financing. He asked different people how they could get a loan when they owed the IRS money, and the answer was that they didn’t tell the lender.
Over time, Rada has learned where to find this information and now uses it to help lenders know when applicants have these previously hidden liabilities.
“I thought if we came up with a report that would create transparency, lenders would want to see it and pay me money,” Rada said.
“That’s how Tax Guard started. We started 13 years ago and have moved into asset-based lending, factoring and online lending. We are now firmly entrenched in SBA lending and are slowly moving into different verticals within the credit spectrum. »
Why the IRS is Deliberately Slow
Rada explained that the public struggles with the slowness with which it deals with the IRS, but some of those obstacles are intentional.
While a business should prioritize speed and user experience, the IRS focuses on privacy and security. Their insights are the gold standard, but they’re fraught with friction by design.
“People always ask me why the IRS doesn’t have an API?” Rada said.
“Keep in mind that friction is a feature, not a bug, with the IRS. In other words, it prevents fraud. time before it was attacked, so they had to put in place all these stoppages and preventative issues and create friction so that it wouldn’t happen, and if it does happen, it’s very, very kid, they could arrest him.
Learn more about off-balance sheet liabilities as soon as possible
Lenders care about cash flow, and with access to IRS data, Tax Guard gives them the best data, Rada said. They can learn valuable information about a candidate’s health by evaluating reporting patterns, with delays in filing deductions raising a red flag.
“The easiest loan to get is not to write a check to the government,” Rada said. “They’re likely to be borrowing from the government before anyone knows it. When I think of the online lenders that work with us, I think of factoring companies and asset-based lenders; they want to know if these companies have any off-balance sheet liabilities. Do they owe the IRS a lot that they just don’t tell us? That’s where we can bring that to the fore.
SBA loans have been big lately. Rada explained that part of the SBA loan process is providing a tax return transcript that validates the claimed income. Usually this process can take weeks, but Tax Guard gets the information within hours.
Post-pandemic trends to watch
Rada said that as we begin to emerge from the pandemic, one issue to watch is how companies are handling their deferred social security obligations. Companies were allowed to defer this part and then start paying it in percentages. Homeowners are beginning to realize that they have to deal with this accumulated load.
Rada said the data indicated the economy was definitely in line for a slowdown before the pandemic hit if it didn’t head into a recession. Withholding taxes, which are a proxy indicator of wages, tended to fall, and after the outbreak of the pandemic, they collapsed. It peaked in the past year, but is softening again.
“I guess you could say the landscape is slowing down,” Rada said. “We’ll see if that holds up through the year, but I feel like when we look at the data you could see a turning point here in the next six months.”
Rada said trucking was vital for a long time, but is now slowing down. Maybe it’s supply chain issues, because the empty trucks aren’t on the road.
How Washington put the IRS in a bind
He sympathizes with the IRS, which should continue to do more with less. Congress adds stipulations they must adapt to without increasing their capabilities, with Rada likening it to a profitable company cutting out its AR department. Many people and businesses have used the stimulus to meet their tax obligations, and since the IRS is dealing with this backlog, they are not collecting.
“It’s interesting to see these politicians sitting there and saying we have to collect from the rich and collect taxes. You do nothing. The collection is at a standstill. In terms of enforcing taxes due, I think that’s been the biggest shock to me over the last year, it’s (they) can’t.
“It’s like canceling a student loan. They say, ‘we can’t get to the point of forgiving, so we’re just going to delay payments forever.’ We seem to have that with taxes right now.
Rada said they need to increase collections because it doesn’t happen overnight. In the meantime, people are getting used to the new normal.
“It’s a learned behavior,” he said. “If you owe money to the taxman and you haven’t heard from them for a year and a half, do you owe money? I mean, I don’t know.
The company is in an exciting position, Rada noted. They may benefit from stronger government data, but individuals are increasingly concerned about their privacy and increasingly concerned about sharing their information with others, including governments.
And unless governments see the need to innovate, progress will be a bottleneck, Rada said.
“When you think about closing loans in process, if you always knew it took two weeks to get specific information, why bother spending the rest? But now that you can get it, I see these banks trying to put in place initiatives to get it all faster. Maybe not in 30 seconds, but if it’s three hours, that’s a huge win.
“But it wasn’t necessary. It’s like when you look at home loans. Their big challenge is that assessments take 30 days. Why do I have to speed up the rest of the process if I’m waiting 30 days for this assessment? »
The situation is improving, with Rada seeing some institutions hoping to replicate progress in some areas in others. Entire processes are considered. Although we may be talking about the fastest turtle, it’s still an improvement.
A reporting gap exists
Rada said many sources of information that lenders rely on are missing because they are voluntary sources. Nobody knows that the small craftsman does not pay his suppliers on time. This makes IRS data all the more crucial.
“A small business, if it bypasses a local supplier, nobody reports it,” Rada said. “So there are lower metrics on small businesses. I keep coming back to the Internal Revenue Service, the gold standard. Lenders try to compromise, do they want the gold standard?
“So is it enough to get instant information (from other sources) versus the gold standard of IRS issues that you have to wait a bit to get?”
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Tony Zerucha is a longtime contributor in the fintech and alt-fi spaces. Twice nominated for LendIt Journalism of the Year and winner in 2018, Tony has written over 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has moderated panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong.