IRS Announces Changes to Its Tax Debt Activities

In February the IRS announced new rules easing, at least somewhat, the burden of its collection activities.

The change affecting the largest number of people concerns liens. The limit for automatic filing has increased from $5,000 to $10,000. Therefore, if your liability to the IRS is less than $10,000, you will not face the threat of a lien.

Why and how is this important? The three credit rating agencies pick-up and report these liens. As credit ratings become increasingly important in the hiring or rental process, a poor rating may cost you a job or a place to live. These liens can remain on a credit report for seven years.

The IRS will also change its procedures for removing liens. The IRS will now withdraw its lien once the debt is paid in full and the taxpayer requests it (although I question why the IRS was not doing this previously). The IRS will also remove a lien when a taxpayers enters into a direct debit installment agreement for $25,000 or less.

The small business version of an installment agreement will also be increased from $10,000 to $25,000. This program allows the business to pay tax over 24 months, if the tax liability is $25,000 or less.

For taxpayers with little hope of paying their tax debt, the offer-in-compromise program will now be expanded to taxpayers with incomes up to $100,000 and tax liabilities of $50,000 or less. This is twice the former limit.

Do not however interpret this to mean that offers will necessarily be easier to obtain. The number of accepted offers decreased from nearly 39,000 in fiscal 2001 to less than 11,000 in fiscal 2009, according to the Taxpayer Advocate. Let’s compare this to the number of liens, which have ballooned from 168,000 in 1999 to 1.1 million last year. Few, and very few, taxpayers get to settle their tax debt for “pennies on the dollar,” irrespective of the TV commercials.