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IRS Eases Policies to Resolve Tax Debts

April 3, 2011 ( The IRS says it will file fewer tax liens, which give the government legal claim to a taxpayer's property for the amount of his unpaid taxes, and make it easier to remove the liens that are imposed from credit records once the debt has been settled.

The IRS is also promising to expand its offer-in-compromise program, which allows individuals and small businesses that are truly unable to pay their back taxes to settle their debt for less than the amount owed.

"We are making fundamental changes to our lien systems and other collection tools that will help taxpayers and give them a fresh start," IRS Commissioner Douglas H. Shulman says. "People will have a better chance to stay current on their taxes and keep their financial house in order." Not far enough

National Taxpayer Advocate Nina Olson, an independent watchdog who works on behalf of taxpayers, called the announcement "a significant step in the right direction" but said the policies don't go far enough.

Olson says the IRS's plan to double the threshold for triggering automatic tax liens from $5,000 to $10,000 of tax debt does not address the underlying problem of filing liens against taxpayers with little or no property. Instead of automatic liens, she says, the IRS should evaluate liens on a case-by-case basis to determine the taxpayer's financial situation and ability to pay.

Tax-lien notices are picked up by the three credit-rating agencies and remain on a taxpayer's credit report for seven years from the date a tax liability is resolved - or longer if it's not resolved.

"Increasingly, employers, mortgage lenders, landlords, car dealerships, auto insurance companies and credit card issuers utilize credit reports, so a tax lien has the potential to render someone unemployable, unable to obtain housing and unable to obtain car insurance or a credit card, at least at reasonable rates, for many years into the future," Olson wrote in her latest annual report to Congress. "The IRS often collects nothing, yet it inflicts long-term harm on the taxpayer." Additional actions

The IRS says it will modify procedures to make it easier for taxpayers to obtain lien withdrawals. A lien that is "released" continues to be reflected on the taxpayer's credit record for seven years or longer, while a lien that is "withdrawn" is treated as if it had not been filed and is removed from the taxpayer's credit record.

Liens will now be withdrawn once taxes are paid in full. The IRS will also withdraw liens when taxpayers sign up for a direct-debit-installment agreement - authorizing monthly payments to be deducted from their bank account - as long as the unpaid tax debt is $25,000 or less. Liens will be withdrawn once it's clear that the payments are going through.

Olson called the decision to provide lien withdrawal to taxpayers who enter into direct-debit-installment agreements "a prudent decision that should benefit taxpayers and the IRS." Shulman noted that using direct-debit payments lowers set-up fees to users and saves the government money. Settling for less

The IRS is also expanding its offer-in-compromise program to cover more taxpayers. Under the new rules, individuals with annual incomes of up to $100,000 and tax debts of up to $50,000 can participate in the program that allows the IRS to settle the tax liability for less than the full amount owed. However, it is not clear whether doubling the eligibility levels from their previous limits of $50,000 of income and $25,000 of tax debt will improve the low rate at which the IRS accepts compromise offers. The number of accepted offers declined from nearly 39,000 in fiscal 2001 to fewer than 11,000 in 2009, according to the Taxpayer Advocate's annual report. That same year, more than 4 million taxpayers were delinquent on their tax bills.


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