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Taxpayer Advocate Gives Tax Lien Reforms a Mixed Review

February 24, 2011

National Taxpayer Advocate Nina Olson, who heads the Internal Revenue Service’s Taxpayer Advocacy Service, is welcoming several of the changes announced by the IRS in its tax lien process, which she has long criticized, but she also made it clear that the IRS needs to do more.

The IRS said Thursday that it was making major changes to its tax lien process to help struggling taxpayers, including significantly increasing the threshold amount of dollars owed before the IRS would issue a tax lien (see IRS Overhauls Tax Lien System).

“The IRS’s announcement today is a significant step in the right direction,” Olson said in a statement. “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. I will be closely monitoring the guidance the IRS issues to its employees in these areas to ensure that these policies are implemented effectively and are working as intended.

Nina Olson

“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 TAS have seen with respect to lien filings," Olson continued. "First, the IRS announcement says the IRS plans to ‘significantly increase’ the dollar threshold for lien filings, reducing liens by ‘tens of thousands.’ However, the announcement does not specify how many taxpayers will benefit. For context, lien filings stood at 168,000 in FY 1999, at 684,000 in FY 2007 (at the beginning of the recession), and at 1.1 million in FY 2010 – an increase of 550 percent since FY 1999. In the first quarter of FY 2011, moreover, lien filings have risen by an additional 28 percent as compared with the same period last year. Until the IRS conducts additional analysis, it is not clear how many taxpayers will be spared from lien filings.

“Second, the IRS often files liens against taxpayers who own insignificant or no property interests to which the liens can attach," Olson added. "As a result, the lien filing simply damages the taxpayer's financial viability and impairs future tax compliance without any corresponding revenue benefit. In too many cases, the IRS spends taxpayer dollars on lien filing fees where the liens are unproductive. Simply raising the dollar threshold for lien filings does not provide for the level of thoughtful judgment that should serve as the basis for the use of this powerful collection tool.

“Additionally, I am concerned that the IRS is addressing the symptoms and not the root causes of the problem," Olson noted. "The causes of the lien problem are that the IRS is filing liens automatically and without sufficient analysis of the taxpayer's financial situation, that the IRS is filing liens without evaluating the value of the lien in increasing compliance (or its role in creating more noncompliance), and that the IRS continues to establish lien filing policies without any evidence that automatic lien filings generate significant revenue as compared to the financial devastation they visit on taxpayers.

“Finally, these improvements do not address the fundamental failure of IRS tax collection policies; namely, that the IRS does not make outbound calls to delinquent taxpayers early in the process and fails to proactively offer taxpayers various collection alternatives when contacts are made, usually in response to IRS enforcement actions," said Olson. “The IRS uses levies as a calling card; between FY 2008 and FY 2010, the ratio of levies to cases received in the IRS’s Automated Collection System was 86 percent. The IRS makes little effort to personally communicate with taxpayers after the issuance of the initial collection notices – a significant percentage of which are sent to addresses that the IRS knows are ‘undeliverable.’

“Thus, millions of collection accounts sit silently in the queue for months and years, leading taxpayers to believe the IRS is ignoring the debt – which it is," Olson noted. "When the debt gets large enough, the IRS may assign the case to a collection employee, but by then, the debt is substantially larger by virtue of penalties and interest. By this point, for many taxpayers, these debts have become impossible to resolve. The IRS's Chief Financial Officer has determined that approximately 83 percent of collection revenue is collected within two years of a tax assessment, yet at the end of FY 2010, 56 percent of collection cases had assessments older than two years and 80 percent of collection cases involved tax years 2007 or earlier. The IRS's failure to engage taxpayers early, when the debts are small and fresh, is the root cause of many taxpayer cases with collection problems, and the harm to taxpayers and the public fisc is exacerbated by indiscriminate use of automated levies and automated lien filings.”

Comments (1)
The problem of the IRS ignoring the debt for months and years is especially egregious in the case of small employers' who are not remitting the taxes withheld from their employees' pay. If the IRS were to nip these cases in the bud within the first month or two, small employers would not run up years worth of tax debt trying to save a floundering business, ruining themselves financially while continuing to operate on the government's money.
Posted by taxsolutionspc | Friday, February 25 2011 at 9:49AM ET
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