Changes to IRS Tax Lien Process Could Benefit Struggling Taxpayers

The Internal Revenue Service is making changes to its tax lien process in an effort to help struggling taxpayers get a fresh start with their tax liabilities.

According to the IRS, the goal is to assist small businesses and individuals in meeting their tax obligations, without adding an unnecessary burden. The IRS said its new policies and programs would help taxpayers pay back taxes and avoid tax liens.

Some of the modifications to the IRS’ lien-filing practices include increasing the dollar threshold when liens are issued, which should result in fewer tax liens. These changes could potentially simplify matters for taxpayers that need to get a lien withdrawal after paying a tax bill.

Other changes involve providing broader access to installment agreements for more struggling small businesses, and expanding the streamlined offer in compromise program to include more taxpayers.

The "significant" increases to the dollar thresholds when liens are filed are designed to keep with inflationary changes since the number was last revised. Liens are automatically filed at pre-defined dollar levels for people with past-due balances. The IRS plans to review the results and impact of the lien threshold change in another year.

While the IRS is claiming that these changes will help significantly, others are critical, saying that the changes don’t go far enough. National Taxpayer Advocate Nina Olson was quoted as saying, "The IRS’s announcement is a significant step in the right direction. I am particularly pleased that the IRS plans to create more flexibility for small businesses to enter into installment agreements and for taxpayers to enter into offers in compromise. I also believe that the decision to provide lien withdrawals to taxpayers who enter into direct debit installment agreements is a prudent decision that should benefit taxpayers and the IRS."

She went on to offer reservations about some of the plans. "However, I am concerned that the increase of lien filing thresholds and the flexibility regarding lien withdrawals are not sufficient to address the problems we in [the Taxpayer Advocacy Service] have seen with respect to lien filings.

She noted that the IRS often files liens against taxpayers who own insignificant or no property interests to which the liens can attach, and said she is "concerned that the IRS is addressing the symptoms and not the root causes of the problem."

A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. 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 any acquired thereafter. A lien can affect a taxpayer's credit rating, so it is critical to arrange the payment of taxes as quickly as possible.

The IRS said it would also modify procedures that will make it easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government.

In order to speed the withdrawal process, the IRS also intends to streamline its internal procedures to allow collection personnel to withdraw the liens.

The IRS is making other fundamental changes to liens in cases where taxpayers enter into a direct debit installment agreement, or DDIA. For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

• Lien withdrawals for taxpayers entering into a 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 will also 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 lowers user fees and saves the government money from mailing monthly payment notices. Taxpayers can use the online payment agreement application on IRS.gov to set up direct debit installment agreements.

The IRS said it would also make 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 can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 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 would qualify for the streamlined installment agreement if they pay down the balance to $25,000 or less.

Small businesses will need to enroll in a direct debit installment agreement to participate.

The IRS is also expanding a new streamlined offer in compromise, or 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 current 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.