Taxpayers Find a Little Relief in IRS's New Tax Lien Rules

The Internal Revenue Service has relaxed its policy on liens for unpaid taxes, giving taxpayers a bit more wiggle room to avoid a lien.
The Internal Revenue Service has relaxed its policy on liens for unpaid taxes, giving taxpayers a bit more wiggle room to avoid a lien.

Taxpayers can breathe a little bit easier this week now that the Internal Revenue Service has eased its policy on filing federal tax liens against those who owe unpaid taxes.

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A federal tax lien gives the IRS the right to make a legal claim against a taxpayer's property for the amount of an unpaid tax debt. An IRS lien can knock as much as 100 points off an individual's credit rating or decimate a business's ability to make its payroll or apply for credit. When a lien is filed, the IRS can freeze all bank accounts and instruct anyone that owes money to the taxpayer or business to make all payments directly to the IRS until the debt is paid off.

Lien filings have surged over the last decade, leaving more and more taxpayers to face an IRS nightmare. IRS liens have jumped from 168,000 filed in 1999 to a whopping 1.1 million filed last year.

The Changes

According to the IRS, new changes may decrease the number of liens and lessen the negative impact on taxpayers. The changes include:

  • Significantly increasing the general threshold for liens from $5,000 in unpaid taxes to $10,000.

  • Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.

  • Withdrawing liens, in most cases, when a taxpayer enters into a Direct Debit Installment Agreement.

  • Creating easier access to those payment agreements for more struggling small businesses.

  • Expanding a streamlined "Offer in Compromise" program to help more taxpayers settle their tax debts.

"These steps are in the best interest of both taxpayers and the tax system," said IRS Commissioner Doug Shulman in a statement Thursday. "People will have a better chance to stay current on their taxes and keep their financial house in order. We all benefit if that happens."

Avoiding a Lien

But don't relax too soon. While the IRS touts the policy changes as a way to help debt-deluged taxpayers get back on their feet, taxpayer advocates say the only way to get real relief from an IRS lien is to avoid having one filed against you in the first place.

For one thing, although the IRS has eased the rules under which it will now file a lien, that doesn't mean it will relax the aggressive attempts to collect on its debts. In fact, the relaxed rules mean the IRS is likely to be less sympathetic to those who do not quickly settle their debt or enter into an agreement to do so.

The new policy will no doubt allow the IRS to concentrate on placing liens on taxpayers with larger debts as opposed to pursuing thousands of time-consuming enforcement actions against individuals who owe small amounts. The new changes give taxpayers a few more opportunities to stay away from the most devastating IRS enforcement actions.

Still, it helps to be prepared. "If you haven't filed in a while, and you are not prepared to pay back taxes in full when you file, it is generally a good idea to have a representative to help you navigate through the process," says Patrick Cox, CEO of tax advisory firm, TaxMasters (TAXS). "If you have two or three years of returns, you probably want to work with someone who has expertise in this area."

Coping with a Lien

In case you are hit with an IRS enforcement action, Cox recommends having a tax representation firm contact the IRS on your behalf to find out why the action is being sought, determine your financial capacity to reach a settlement, determine your options and then advise you on what your best options might be.

For example, Cox said many people don't know that the IRS can't take actions that prevent you from paying your mortgage. Tax professionals at firms like TaxMasters or J.K. Harris & Co. are aware of those rules and can help make sure that you enter into an agreement that allows you to pay both the IRS and your bills.

"When the IRS calls on you and you don't have a representative, they take the position that you know as much about taxes as they do," Cox says. "They assume that you know all of your options and they assume that whatever you agree to, you are doing so because you want to."

Consumers can find all the information they need to prepare for and respond to an IRS lien on the IRS website. However, the information is not easy to decipher and it may take days of study to truly understand your rights and determine all of your best options.

"If you don't know to ask for something, you are probably not going to be told that there is an option available," Cox says.