IRS Commissioner Doug Shulman recently announced these and other changes, saying the steps would give struggling taxpayers a "fresh start." It's the latest effort by the IRS to ease up on the American taxpayer during this weak economy.
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This new leniency on liens comes after the number of IRS claims against taxpayers' property had skyrocketed. Last year, the IRS filed 1.1 million liens, up 550 percent from 1999, according to the National Taxpayer Advocate, an independent position within the IRS to represent taxpayers' interests.
Liens damage a taxpayer's credit history and make it even harder to borrow and dig out of trouble, so tax experts applaud these latest measures, though some insist the IRS could go even farther to provide relief.
The IRS changes take effect immediately. Among them: The IRS raised the amount of unpaid taxes that generally triggers a lien from $5,000 to $10,000. Shulman says the increase means that "tens of thousands of people won't be burdened by liens."
The agency also says it will make it easier for delinquent taxpayers to get an IRS lien withdrawn, meaning it will be treated as if it were never issued. Previously, taxpayers could request that a lien be withdrawn, but the IRS rarely agreed, tax experts say.
Typically, the IRS releases a lien when back taxes are paid, but the negative information remains on credit reports for seven years. And, as far as credit scores go, a released lien is just as bad as an unpaid tax bill because both show that the consumer reneged on a financial obligation, says Craig Watts, a spokesman for FICO, the creator of a widely used score.
Under the new policy, delinquent taxpayers who owe $25,000 or less and enroll in a Direct Debit Installment Agreement — in which monthly payments to the IRS are automatically withdrawn from the taxpayer's bank account — can have their liens withdrawn. Also, liens can be withdrawn if taxpayers switch from a standard installment plan to debit payments. Taxpayers will have to pass a probationary period of making debit payments before the IRS will lift a lien.
The major credit bureaus delete withdrawn liens from their records, says Norm Magnuson, a spokesman for the Consumer Data Industry Association. And information on credit reports determines credit scores, which are used by businesses to make lending decisions.
But be aware: If taxpayers have a lot of other negative information on their reports, the withdrawal of IRS liens might not make a huge difference in scores, warns Watts.
Besides revising its practices on liens, the IRS has expanded its Offer in Compromise program, in which the agency agrees to accept less than what the taxpayer owes. The program is now available to individuals with income of up to $100,000 who owe less than $50,000 — a doubling of both limits.
Nina Olson, the National Taxpayer Advocate, said in a statement that the IRS is making a "significant step in the right direction" but that it's not clear how many taxpayers actually will be spared liens under the new policy.
Olson says the IRS needs to do more to reach out to struggling taxpayers early on while "the debts are small and fresh," rather than waiting until interest and penalties mount.
Some of the IRS' earlier efforts have made a difference. Last year, for example, the IRS announced that agents would have more leeway to settle tax bills for less than owed if a taxpayer lost a job or saw income fall.
"There has been a noticeable change," says Larry Moran, a Towson-based enrolled agent, who represents taxpayers before the IRS. "They are more amenable to settling an issue ... and recognize that some mistakes are an oversight and not deliberate."
When behind on your taxes:
•Don't hide from the IRS. Contact the agency to see what payment options are available. Or seek the help of a tax professional if you don't want to deal with the IRS.
•Make sure you are up to date on filing past returns. This avoids onerous failure-to-file fees.
•If you need an extension of up to 120 days to pay, request more time through the Online Payment Agreement application at IRS.gov or 800-829-1040. The interest and penalties will be less than with a longer-term installment plan.
•If you owe up to $25,000, you can request an installment payment plan online. Or, enroll in the debit payment plan to get an IRS lien withdrawn. Taxpayers with larger balances must submit a financial statement to determine monthly payments.
•The IRS also accepts payments by credit card, although the card company might charge a higher interest rate than the agency.