6 major changes to IRS collection policies

Published
  • April 19 2017, 7:53pm EDT

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Recently, joint research from the Internal Revenue Service and the Urban-Brookings Institute highlighted the results of many IRS enforcement activities, including the impact of past years’ changes to IRS Collection policy. It is no secret that the IRS has been kinder and gentler to tax debtors during the past five years.

The 2012 Fresh Start Initiative and the relaxing of lien filings and levies during the past five years has relieved burden on taxpayers and the resource-constrained IRS. However, this more relaxed policy hasn’t resulted in maximizing collection for the U.S. Treasury. The IRS continues to tweak its collection policies and procedures to collect the most tax dollars.

During the past five years, new laws and IRS administrative changes to collection policy have been frequent, and can be hard for taxpayers and tax professionals to keep up with. This year has been no exception; in fact, 2017 has seen these six important changes to IRS collection policy.

1. Private debt collection begins

The IRS has tried private debt collection twice before (see "Here come the private debt collectors ... again"). Now comes a third wave, prompted by a 2015 law passed by Congress. This year, four private debt collection companies will start pursuing old tax debts that the IRS is no longer chasing.

The impact: With the onslaught of tax identity theft schemes, taxpayers face new complications when an outside agency contacts them. Is the phone call real, or is it a scammer? To combat confusion, the IRS and collection agencies will send letters to these taxpayers ahead of time to notify them that a debt collector will call. The program is starting now, and the National Taxpayer Advocate will likely weigh in soon on its impact to taxpayers and the IRS's efforts to combat tax identity theft. Stay tuned.

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2. The government is restricting passports for people who owe "seriously delinquent tax debt"

Under another new program initiated by Congress, the IRS sends a list of tax debtors to the State Department, which restricts their passports (see "10 things you need to know about passport restrictions on delinquent taxpayers") for international travel. These people all owe tax bills of more than $50,000 and haven’t set up an agreement or other IRS option to pay the balance.

The impact: Hundreds of thousands of passport holders with seriously delinquent tax debt will now have to get right with the IRS or stay put. The catch: If taxpayers need the government to lift the passport restriction immediately, they are out of luck. The IRS has 30 days to notify the State Department that it can lift the restriction. Right now, taxpayers with emergency travel needs must turn to the National Taxpayer Advocate. Even then, the process could take considerable time.

3. The offer in compromise program gets strict on filing compliance

The IRS has traditionally allowed taxpayers some extra time to file all their required returns during the application process for an offer in compromise. Those days are over. A recent change requires taxpayers to file all their required returns before applying for this tax-debt settlement agreement.

The impact: If taxpayers haven't filed, the IRS rejects the offer outright and keeps the down payment (which can be as high as 20 percent of the offer amount).

4. Collection Financial Standards expense limits went up

In late March/early April each year, the IRS updates a set of standards that it uses to help determine a taxpayer's ability to pay a delinquent tax debt. These expense standards set budget limits for taxpayers' maximum payment amounts for certain collection agreements. The agreements include installment agreements based on financial ability to pay, deferred payment (currently not collectible status), and offers in compromise. This year, the structural categories of collection financial standards didn’t change. But the expense limitations increased in almost every area, except the standard allowance for out-of-pocket medical expenses.

The impact: Financially struggling taxpayers may get some more wiggle room in their budgets this year when negotiating collection arrangements with the IRS. People already in these agreements may look to renegotiate their terms to lower payment amounts.

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5. The IRS is testing faster processing for certain higher-debt installment agreements

In October 2016, the IRS piloted a test to provide streamlined processing of installment agreements for tax balances between $50,000 and $100,000. The test allowed people who owe these amounts to establish an installment agreement with payment terms of 84 months without filing detailed financial statements with the IRS. The catch is that the IRS will still file a tax lien on these taxpayers.

The impact: Higher-debt taxpayers will be able to get into an agreement with the IRS faster. In particular, people affected by passport restrictions (see No. 2) will be able to travel again sooner. And the IRS won't have to review extensive financial documents to determine how much taxpayers should pay each month.

6. IRS.gov now shows tax balances

IRS transcripts have always been a poor source to determine how much taxpayers owe the IRS. Why? Because of IRS system limitations, transcripts can’t always display accrued penalties and interest on an unpaid tax bill. Instead, taxpayers and their professionals would have to call the IRS to ask for a payoff amount that the IRS calculated with its payoff calculator tool. Now, taxpayers who can authenticate their identities to get into the new online system can look up their outstanding balances. If they owe less than $50,000, taxpayers – or their licensed tax professionals - can submit a streamlined installment agreement request.

The impact: More than 90 percent of all payment arrangements can now effectively be set up online. Taxpayers will have the information and the capability to do this all online. This is an important step in the IRS effort to implement online tools to help taxpayers understand their status with the IRS, get more information about their account, and resolve matters quickly online - much like they can already do with other financial service providers.

The takeaway: Stay in compliance to avoid collection altogether

IRS collection policy, practice, and rules change more frequently than most other areas of tax procedure. Congress has also weighed in in recent years to give the IRS more effective collection tools.

The best way for taxpayers to avoid IRS enforcement action is to get into an agreement on any unpaid balances. The next wave of IRS policy changes may not be kinder and gentler, so it is important to get into good standing now and stay there.

Tax professionals have always been crucial to help clients navigate the continual changes and options in IRS collection policy. This is true now more than ever.