IRS Softens Lien Rules for Tax Scofflaws
Policy + Politics

IRS Softens Lien Rules for Tax Scofflaws


The Internal Revenue Service is cutting some taxpayers slack by raising the threshold for going after people who owe back taxes. Under the new, more lenient policy, liens can only be issued on taxpayers once their overdue tax bill exceeds $10,000, compared to the current $5,000 level.    

Tax liens rose sharply in recent years in the midst of an historic recession. The IRS issued about 1.1 million liens in fiscal 2010, compared with only 426,000 in fiscal 2001.   The increase in liens also reflects what some describe as the nation’s rising “tax gap,” the difference between what taxpayers pay each year and what the IRS is owed. That annual gap is currently about $290 billion, according to the IRS. 

After the IRS has notified and attempted to negotiate outstanding debts with a taxpayer, it can issue a tax lien, which gives the agency rights to a taxpayer’s property for the amount of an unpaid tax debt.  It can tarnish an individual’s tax score, and raise red flags for potential lenders.

The decision to ease the rule on liens is “especially appropriate as the American people and small businesses are climbing out of the worst recession in a generation,” IRS Commissioner Douglas Shulman told reporters on a conference call Thursday.  

But while the IRS makes clear that the goal is to help struggling taxpayers during tough economic times, the change could drive up revenues as well, said CCH principal tax analyst Mark Luscombe.  “If people perceive that there is some hope for them to enter into an installment payment agreement, that certainly has the potential to produce revenue quicker than if the people gave up and declared bankruptcy,” he said.” 

The new rules promote repayment programs, by widening eligibility requirements for firms and individuals already slapped with tax liens to enroll in 24-month plans called Direct Debit Installment Agreements.   Now, firms with  tax bills of $25,000 or less can enroll, whereas before, only companies with $10,000 or less in tax debt could participate.    Under the program, the IRS typically withdraws payments directly from the person’s checking account in installments, and in many cases, will withdraw the lien, Schulman said. 

The new policies also expand the offer-in-compromise program, which lets taxpayers settle for less than their total tax bill, by opening it up to those who owe as much as $50,000, up from the current $25,000 cap.   A compromise offer is only accepted when the IRS believes the taxpayer will be unable to pay the full amount based on their assets.

The  announcement follows a recent spike in taxpayer advocate complaints that the IRS has been too quick and aggressive to punish taxpayers who have been hit hard by the recession, and are left unable to pay their tax bills. 

“By 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,” wrote National Taxpayer Advocate Nina E. Olson in a yearly report to Congress last month. “I find it unacceptable that the IRS continues to torment financially struggling taxpayers in this way.”