IRS taking steps to give struggling taxpayers a ‘fresh start’

Published 4:00 am Thursday, March 10, 2011

The Internal Revenue Service says it will file fewer liens against those who owe back taxes and make it easier for taxpayers to get liens withdrawn — a move that wipes the blemish from credit reports.

IRS Commissioner Doug Shulman recently announced these and other changes, saying the steps would give struggling taxpayers a “fresh start.” It’s the latest effort by the IRS to ease up on the American taxpayer during this weak economy.

“These changes are good for people facing tough times,” Shulman said during a telephone news conference.

This new leniency on liens comes after the number of IRS claims against taxpayers’ property had skyrocketed. Last year, the IRS filed 1.1 million liens, up 550 percent from 1999, according to the National Taxpayer Advocate, an independent position within the IRS to represent taxpayers’ interests.

Liens damage a taxpayer’s credit history and make it even harder to borrow and dig out of trouble, so tax experts applaud these latest measures, though some insist the IRS could go even farther to provide relief.

Among the changes: The IRS raised the amount of unpaid taxes that generally triggers a lien from $5,000 to $10,000.

Shulman says the increase means that “tens of thousands of people won’t be burdened by liens.”

The agency also says it will make it easier for delinquent taxpayers to get an IRS lien withdrawn, meaning it will be treated as if it were never issued. Previously, taxpayers could request that a lien be withdrawn, but the IRS rarely agreed, tax experts say.

Typically, the IRS releases a lien when back taxes are paid, but the negative information remains on credit reports for seven years. And as far as credit scores go, a released lien is just as bad as an unpaid tax bill because both show that the consumer reneged on a financial obligation, said Craig Watts, a spokesman for FICO, the creator of a widely used score.

Under the new policy, delinquent taxpayers who owe $25,000 or less and enroll in a Direct Debit Installment Agreement — in which monthly payments to the IRS are automatically withdrawn from the taxpayer’s bank account — can have their liens withdrawn. Also, liens can be withdrawn if taxpayers switch from a standard installment plan to debit payments. Taxpayers will have to pass a probationary period of making debit payments before the IRS will lift a lien.

The major credit bureaus delete withdrawn liens from their records, said Norm Magnuson, a spokesman for the Consumer Data Industry Association. And information on credit reports determines credit scores, which are used by businesses to make lending decisions.

But be aware: If taxpayers have a lot of other negative information on their reports, the withdrawal of IRS liens might not make a huge difference in scores, Watts said.

Behind on your taxes?

• Don’t hide from the IRS. Contact the agency to see what payment options are available. Or seek the help of a tax professional if you don’t want to deal with the IRS.

• Make sure you are up to date on filing past returns. This avoids failure-to-file fees.

• If you need an extension of up to 120 days to pay, request more time through the Online Payment Agreement application at IRS.gov or 800-829-1040. The interest and penalties will be less than with a longer-term installment plan.

• If you owe up to $25,000, you can request an installment payment plan online. Or, enroll in the debit payment plan to get an IRS lien withdrawn.

• The IRS also accepts payments by credit card, although the card company might charge a higher interest rate than the agency.

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