Magazine article Business Credit

Leveraging Uncle Sam

Magazine article Business Credit

Leveraging Uncle Sam

Article excerpt

Getting the Threat of the IRS Behind Your Collection Effort

In the quest for successful collection efforts, credit professionals must strike a balance between being likeable and being firm. The old, widely relied-on adage that "people pay who they like" is certainly true, but after collection letters go unanswered and calls start losing their flair, it can be extremely difficult to maintain a veneer of goodwill for even the most softhearted credit professional. In a number of instances, many debtors won't understand anything but the long arm of the law and legal action is necessary to force them into discussion regarding the money in question. Other debtors will respond better to a third party, like an NACM affiliate, which can focus on collecting your company's money.

Still, collection efforts are an important part of a credit professional's job, and while it's important to be aware of the options when your efforts seem futile or you've become too frustrated with the account, it's also important to have one last resort, an ace in the hole to be played when no amount of collection letters or collection calls will do.

May I Have Your Attention?

In the simplest terms, the main goal of collection efforts is to get the debtor's attention. "You want to drag them into this," said Ben Ricci, president of Stevens & Ricci Inc. "The bottom line is to get them to just pay the bill." This is the aim of all those various forms of contact made to a debtor who's fallen off the radar. These can be enhanced with a legal or institutional, bite but, for a real attention-grabber, there's no better dog to sic on a debtor than the U.S. government.

According to Ricci, creditors can request a 1099 from their debtor pertaining to the money they owe. The form declares, to the Internal Revenue Service (IRS), that the money owed to the creditor has not been paid by the debtor and that the debtor is responsible for payment. "The objective is to get paid," he said. "We're using the IRS as a leveraging tool." Essentially, if a debtor listed the owed payment on their tax return as paid and taken care of, filing a 1099 related to that payment could lead the IRS straight to your debtor's doorstep.

In most cases, the impending threat of government action is enough to move a debtor to pay. "This is a collection technique," said Ricci. "We're using it to get their attention and in that regard it's very effective. It's all bark and no bite, but that's what collections is." He added, "It's the fear factor." As any of the currently incarcerated former Enron executives will tell you, hell hath no fury like an irate federal regulatory body. On a smaller scale, this collection method operates on the same principle.

Not the IRS

The initial step toward filing a 1099c "cancellation of debt" form is first sending the debtor a W-9, also known as a request for a taxpayer identification number. "You fax them a W-9; you make an announcement to people that says 'you didn't pay me,'" said Ricci, who also suggests including a well-crafted letter with the W-9 that references the invoice in question and gives your company a great deal of options when it comes to the actual filing of these forms. "This collection system is all about telling them that they could be audited," he said. "It's true that they could get audited if you file a 1099." Additionally, a debtor who doesn't pay attention to a W-9 could be in for another set of problems. "There's a federal fine for not returning a W-9," said Ricci. "If you provide false information, it's an even bigger fine."

The letter can also push some collection pressure points even more forcefully to encourage the debtor to pay, namely by including language that informs the debtor that your company, if it doesn't receive a W-9, can file a 1099c incomplete. Including a phrase like, "We will, at our option, issue the 1099c incomplete," ratchets up the intensity as well as the chances for a potential audit, which is almost certain if the IRS receives an incomplete 1099c. …

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