MONEY MATTERS: IRS: Kinder, gentler approach to unpaid taxes

By Burton S. Speer

The Daily Record Newswire

Last week, the Internal Revenue Service began publicizing its latest effort to help struggling taxpayers by making significant changes to its lien filing practices that will hopefully lessen the negative impact on taxpayers. A federal tax lien gives the IRS a legal claim to a taxpayer's property, which can freeze bank accounts and can seriously effect a taxpayer's credit rating, often reducing their credit score by up to 100 points.

Over the past dozen years, the number of tax liens filed increased over 600 percent. The IRS claimed that the new policies are the result of a detailed review of their collection practices begun last year, and are another in a series of steps to help struggling taxpayers.

In the announcement the IRS said they were making these modifications to help taxpayers and give them a fresh start. The changes include:

* Doubling the threshold for when liens are generally issued. Currently, liens were generally filed for unpaid taxes of $5,000, but that amount is now doubled to $10,000. The IRS said that the new amount is in keeping with inflation, as the threshold was last changed over 20 years ago. Going forward, the IRS plans to review the results of the lien threshold change in about a year;

* Making it easier to obtain a lien withdrawal. Liens will now be withdrawn once full payment of taxes is made (if the taxpayer requests it), and the IRS will speed the process by allowing IRS collection personnel to withdraw the liens. "Raising the lien threshold keeps pace with inflation and makes sense for the tax system," the IRS said, adding "These changes mean tens of thousands of people won't be burdened by liens."

Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement. The experience of the IRS is that taxpayers entering into Direct Debit Installment Agreements, where the IRS makes automatic monthly withdrawals from the taxpayer's bank account, are normally good credit risks. As a result, for taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals for taxpayers either entering into a DDIA, or converting from a regular Installment Agreement into a DDIA. Taxpayers on an existing DDIA can also request to have liens withdrawn;

* Easier access to Installment Agreements. The IRS will also make streamlined Installment Agreements available to more small businesses. The program raises the dollar limit to allow additional small businesses to participate from $10,000 to $25,000, and will allow up to 24 months to pay off the tax liability. Businesses with an unpaid balance over $25,000 would need to bring the balance under that limit in order to qualify.

The IRS noted: "Small businesses are an important part of the nation's economy, and the IRS should help them when we can. By expanding payment options, we can help small businesses pay their tax bill while freeing up cash flow to keep funding their operations."

* Expanding a streamlined Offer in Compromise program. 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. The new process covers more taxpayers by doubling the maximum allowable income level from $50,000 to $100,000. Additionally, the maximum tax owed has also been doubled from $25,000 to $50,000.

While this seems too good to be true, it should be noted that the IRS is very stringent in allowing the outright forgiveness of tax liability, except in extreme hardship situations.

Of course the best option is not to be in a situation for the IRS to file a lien in the first place. Over the past few years, the IRS has made efforts to make it easier to pay your taxes, and stay out of trouble. While they still will take your check, you can now make your tax payment electronically with an e-filed tax return, or even use a credit or debit card. But what happens when you just can't pay the tax man?

First of all, file your individual tax return, even if you do not include the payment. There are severe penalties for not filing a return. The penalty for late filing is 5 percent of the tax not paid by the due date for each month, or even just part of a month, that your return is late.

While the maximum penalty is 25 percent of the tax due, if your return is more than 60 days late, the minimum penalty is the smaller of $100 or 100 percent the tax not paid. At that point, the IRS will send you a notice asking for the tax due, and while this process avoids the penalty for not filing your return, the IRS will still charge interest on the unpaid balance, and may add a late payment penalty of .5 percent per month.

However, at this point, you still owe your tax. If you can't come up with the money, you can request to stretch the balance due over time from the IRS by submitting an Installment Agreement Request using Form 9465. Generally the IRS agrees to most requests from those who agree to pay the outstanding tax within 12 months and to keep current with the current year's taxes.

Burton S. Speer is a principal in the tax department at Mengel, Metzger, Barr & Co. LLP, and can be reached at or (585) 423-1860.

Published: Tue, Mar 8, 2011