In an effort to help struggling taxpayers and small businesses,
the IRS is trying to reduce the damage that collecting back taxes
can inflict on personal and business finances.
The IRS says it will file fewer tax liens, which give the
government legal claim to a taxpayer's property for the amount of
the 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
"We are making fundamental changes to our lien systems and other
collection tools that will help taxpayers and give them a fresh
start," says IRS Commissioner Doug Shulman. "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 she says the new
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 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."
She noted that the IRS filed more than one million tax liens in
the 12 months ending September 30, 2010, a 550% increase from ten
years earlier. "Absent data that show liens make a meaningful
contribution to revenue collection, and especially in this economy,
I find it unacceptable that the IRS continues to torment
financially struggling taxpayers in this way," she says.
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
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 debt payments lowers set-up fees to
users and saves the government money by not having to send monthly
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
participant 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 year 2001
to fewer than 11,000 in fiscal year 2009, according to the Taxpayer
Advocate's annual report. That same year, more than four million
taxpayers were delinquent on their tax bills.
Although only a small fraction of tax debts are settled for
pennies on the dollar, you would think it was a common occurrence
if you believe the debt settlement firms' ads on TV. Some
high-profile firms, such as Roni Deutch, the self-proclaimed "Tax
Lady," have run afoul of state and federal regulators. Last summer,
California attorney general (now governor) Jerry Brown sued Deutch
for $34 million for claiming she has a 99% success rate. The suit
claims she actually reduced the amount her clients owed in less
than 10% of the cases.
In response to emailed questions from Kiplinger, Deutch said
"nothing could be further from the truth. In the 20 year history of
this law firm, not one advertisement has ever mentioned a 'success
rate.'" Deutch said the percentage of her clients who negotiate an
offer in compromise with the IRS to reduce their tax debt is
consistently much higher than average
Help from the pros
Tax-settlement firms have their place. Few taxpayers are up to
the task of navigating the lengthy offer-in-compromise process on
their own or mounting a compelling defense against the IRS, which
has been called the world's largest collection agency. "You need
someone who knows the offer-in-compromise process and who speaks
the language," says Peter Stephan, head of the Tax Resolution
Institute, in Encino, Cal.
But be wary of promises that sound too good to be true. To check
out a company's reputation, type the firm's name plus "complaint"
in an Internet search engine. If you come up with pages and pages
of complaints, run away, says Stephan. Also, check the firm's
Better Business Bureau rating and ask about the credentials of
people who would handle your case. Ideally, you want the experience
and expertise of tax attorneys, CPAs or enrolled agents.
"It's very difficult to get an offer in compromise through,
particularly for taxpayers who are relatively young, educated and
who have future earning potential," says Stephan. The IRS uses a
strict formula to determine how much of a tax debt it can
realistically recover, based on your current disposable income and
assets that can be sold quickly to raise cash. The older the tax
bill -- which can grow substantially with ever-accumulating
interest and penalties -- and the older the taxpayer, the more
likely the IRS will accept an offer for reduced payment, he says.
The ideal candidate? Old, sick, poor and almost dead.
While you may have trouble paying the taxman, don't expect a
private tax-resolution company to represent you for free. Such
firms want your money upfront before they'll agree to take your