Report Finds IRS Going Soft on Tax Liens

The Internal Revenue Service basically dismissed over $1.4 billion in delinquent taxes between 2002 and 2008 without filing tax liens to collect them, according to a new report.

The report, by the Treasury Inspector General for Tax Administration, faulted IRS revenue officers for not documenting valid reasons why they decided not to file tax liens in many cases.

The IRS protects its claims against taxpayers who owe delinquent taxes by filing federal tax liens that establish the IRS’s priority among secured creditors for the taxpayers’ equity. Liens are generally filed on balance-due cases in which a taxpayer has received a notice demanding payment and has neglected or refused to pay. 

However, IRS revenue officers can decide not to file liens when a taxpayer is in bankruptcy, has died without assets, when a corporation is defunct or for a variety of other reasons.  Revenue officers are required to document a decision on whether a lien should be filed and include an explanation when they are not filed.

Revenue officers are supposed to attempt initial contact with a taxpayer or taxpayer’s representative within 45 days after they are assigned the taxpayer’s modules. A “module” refers to one specific tax return filed by the taxpayer for one specific tax period (year or quarter) and type of tax (i.e., individual, corporate, employment, excise, etc).

According to the report, the IRS did not make lien determinations for 210 open modules at two collection field offices representing a balance due of $6.4 million. In addition, IRS revenue officers did not document valid reasons for not filing liens when closing as “currently not collectible” an estimated 2,297 modules, with $72 million in delinquent taxes.

The report also found that liens were not filed on shelved modules within a certain dollar threshold, even though an IRS study has shown a benefit in doing so. TIGTA’s analysis found that between 2002 and 2008, the IRS shelved, without filing liens, modules representing approximately $1.4 billion in delinquent taxes. Shelved modules are placed in a currently not collectible status and no collection work is conducted.

“The IRS must ensure the appropriate handling of lien determinations,” said TIGTA Inspector General J. Russell George in a statement. “Failure to protect the government’s interest on taxes that are owed creates an unfair burden on taxpayers who properly pay their taxes in full and on time.”

TIGTA made eight recommendations that the IRS ensure that its revenue officers document their reasons for not filing liens against delinquent taxpayers and ensure that timely lien determinations are made. The IRS agreed with all of TIGTA’s recommendations.