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Owe Back Taxes? IRS Promises More Leniency in Collections Efforts

For taxpayers who owe back taxes, IRS says its liens and other collection efforts may not be as aggressiveAre we seeing a kindler, gentler IRS? The IRS recently announced that it will be implementing new policies and programs to help taxpayers pay back taxes and avoid tax liens. This new approach has been met by many with a welcome, though perhaps wary, eye.

Reducing the aggressive tactics used by IRS has been long favored by many in the tax profession. The issue was raised again earlier this year when the National Taxpayer Advocate (NTA), Nina Olson, released her annual report to Congress and noted that the existing rules for liens hindered, not helped, IRS collections efforts. Her comments echoed those she made last year about existing IRS collections tactics.Despite repeated calls for collections reform, the IRS has not signaled that it would scale back efforts until now. In fact, Olson's office reported that the use of tax liens has increased during the recession, not decreased. Over the past 10 years, the IRS has ramped up aggressive collections efforts without a significant boost in actual collections. In fiscal year 2010, the IRS filed protective liens against 1.1 million taxpayers compared to 168,000 liens filed in FY1999; that's a 550% increase. In the past seven years, the number of liens filed by the IRS is estimated to be at least 5 million.

Tax liens are a powerful tool that gives the IRS legal claim to a taxpayer's property. Liens can affect a taxpayer's credit score, making it nearly impossible to get credit to buy or refinance a house and, in some cases, land a job or get financial aid. Olson has said about tax liens, "[b]y filing a lien against a taxpayer with no money and no assets, the IRS often collects nothing, yet it inflicts long-term harm on the taxpayer by making it harder for him to get back on his feet when he does get a job."

Now, however, IRS Commissioner Doug Shulman says the IRS will nearly double the threshold for imposing a lien for back taxes from $5,000 to $10,000. Shulman estimates that "[t]ens of thousands of people won't be burdened by liens."

It's a step in the right direction, though Olson says it won't address some of the problems that she outlined in her report to Congress: "[s]imply raising the dollar threshold for lien filings does not provide for the level of thoughtful judgment that should serve as the basis for the use of this powerful collection tool."

In addition to increasing the threshold for placing liens, the IRS has agreed to steps that will make it easier to withdraw liens once they are in place. For example, for taxpayers with unpaid tax obligations of $25,000 or less, the IRS will allow a lien to be withdrawn after a Direct Debit Installment Agreement (DDIA) is reached and the taxpayer has demonstrated continued compliance.

The IRS has also announced that it's easing the restrictions on its Offer in Compromise (OIC) program. Offers in Compromise allow taxpayers to negotiate with the IRS to pay outstanding tax balances. Typically, a small percentage of taxpayers are able to successfully reach an agreement. Even with this signal from IRS that it is more amenable to negotiations, taxpayers should continue to be wary of tax practitioners who promise settlements of "pennies on the dollar." Those results are far from typical.

Obviously, the best advice for taxpayers is to stay compliant. But as we all know, sometimes life gets in the way. Unexpected expenses, unemployment, bad advice, medical catastrophes and other events can affect your finances and your taxes in ways that you never contemplated. Hopefully, the IRS will continue to take a page from Olson's report to Congress and make resolving tax controversies and satisfying tax obligations easier for taxpayers, not more difficult.

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