IRS also Announces Major Changes Made to Lien Process

In its latest effort to help struggling taxpayers, the Internal Revenue Service in February 2011 announced a series of new steps to help people get a fresh start with their tax liabilities. The stated goal of these steps is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers. Specifically, the IRS announced new policies and programs to help taxpayers pay back taxes and avoid tax liens.

The IRS’s announcement centers on the IRS making important changes to its lien filing practices that hopefully will lessen the negative impact on taxpayers. The changes include:

• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
• Creating easier access to Installment Agreements for more struggling small businesses.
• Expanding a streamlined Offer in Compromise program to cover more taxpayers.

This is another in a series of steps by the IRS intended to help struggling taxpayers. In 2008, the IRS announced lien relief for people trying to refinance or sell a home. [See IRS article, “IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell” (IR-2008-141)] In 2009, the IRS added new flexibility for taxpayers facing payment or collection problems. [See IRS article, “IRS Begins Tax Season 2009 with Steps to Help Financially Distressed Taxpayers; Promotes Credits, e-File Options” (IR-2009-2)] Also, in 2010, the IRS held about 1,000 special open houses to help small businesses and individuals resolve tax issues with the Agency. The February 2011 announcement came after a review of collection operations which the IRS Commissioner launched in 2010, as well as input from the Internal Revenue Service Advisory Council and the National Taxpayer Advocate.

Tax Lien Thresholds

Under the newly stated policy, the IRS significantly will increase the dollar thresholds when liens generally are filed. The new dollar amount is intended to be in keeping with inflationary changes that have arisen since the number last was revised. Previously, liens were automatically filed at certain dollar levels for people with past-due balances (usually $5,000 or more). That amount now generally has been increased to people with past-due balances of $10,000 or more, which should result in significantly fewer lien filings (tens of thousands in the IRS’s own estimation). In its announcement, the IRS also stated that it plans to review the results and impact of the lien threshold change in about a year.

A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. From the government’s standpoint, filing a Notice of Federal Tax Lien is necessary to establish priority rights against certain other creditors. Usually the government is not the only creditor to whom the taxpayer owes money. A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. This includes property owned at the time the notice of lien is filed and property acquired by the taxpayer thereafter. A lien can affect a taxpayer’s credit rating, so it is critical to arrange the payment of taxes as quickly as possible.

Tax Lien Withdrawals

The IRS further stated in the February 2011 announcement that it also will modify procedures that will make it easier for taxpayers to obtain lien withdrawals once taxes have been paid. According to the announcement, liens now will be withdrawn once full payment of taxes is made if the taxpayer requests such withdrawal. The IRS stated that it determined that this approach is in the best interest of the government. Previously, liens could remain on record for years after the tax was paid or the balance was negotiated to a reduced amount, and also could stay on a taxpayer’s credit report for years after the tax was paid or negotiated. In order to speed the withdrawal process, the IRS stated that it also will streamline its internal procedures to allow collection personnel to withdraw the liens.

Direct Debit Installment Agreements and Liens

The IRS stated further in its announcement that it is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS now will allow lien withdrawals under several scenarios:

• Lien withdrawals will be allowed for taxpayers entering into a new Direct Debit Installment Agreement.
• The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
• The IRS also will withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. In addition, this approach should lower overall user fees and at the same time will save the government money from having to mail monthly payment notices. Taxpayers can use the Online Payment Agreement application on www.IRS.gov to set-up Direct Debit Installment Agreements. A link to the application also is available under the links on this website (www.shadianlaw.com).

Installment Agreements and Small Businesses

In addition to the above changes applicable to individual taxpayers, the IRS also announced that it is making streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax now can participate. Previously, only small businesses with under $10,000 in liabilities could participate. Small businesses will have up to 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 still would qualify for the streamlined Installment Agreement if they can pay down the balance to $25,000 or less. Small businesses will need to enroll in a Direct Debit Installment Agreement to participate.

Offers in Compromise

Finally, the IRS announced that it was expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the previous limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

To get further information about these new programs to help pay or negotiate tax debts and/or tax liens, contact your professional tax advisor or tax preparer, or contact this office at (503) 352-6985, or visit www.shadianlaw.com. Please also feel free to forward this article to others you know that might benefit from this information (you can use the convenient link below). In addition, if you have received a notice from the IRS and you are not sure what to do, please review this prior article, “Don’t Panic! Some Things to Know If You Receive an IRS Notice.”