Last Thursday, IRS commissioner Doug Shulman announced a new set of initiatives to help taxpayers struggling to pay their taxes or pay off back taxes in this lackluster economy. Sometimes IRS enforcement actions (e.g. tax lien) can bury the taxpayer further which lessens not only their ability to climb out of the hole they are in, but the probability the taxpayer will come into compliance. In other words, sometimes enforcement actions by the IRS decrease the taxpayer’s ability to pay, making it less likely the IRS would collect the tax revenue owed to it. For example, with tax liens, the National Taxpayer Advocate report last month stated how tax liens can be counterproductive in helping taxpayers come into compliance with the IRS as they can worsen a taxpayer’s financial situation.
The IRS set new policies that intend to help those with back taxes or tax debt. Here is a review of these policy changes:
Tax Lien Changes
The IRS announced a few major policy changes in regards to tax liens.
- The IRS will increase the tax debt threshold in which tax liens are generally issued from $5k to $10k. This can help those having trouble paying taxes at lower amounts prevent their financial situation from deteriorating so that they can get back on their feet or into compliance. As a result, less tax liens will be filed. The IRS will revisit lien threshold changes next year to see the effects of this specific policy change.
- The IRS will also make it easier to obtain tax lien withdrawals. This means once a taxpayer has come into compliance (e.g. paid off the tax debts and or setup acceptable arrangements with the IRS such as an IRS Installment Agreement), the IRS will make it easier to get the lien expunged from a taxpayer’s record. Normally, even when back taxes are paid, a person’s record or credit report will show the lien as being “released,” which still does harm to the taxpayer. Now the IRS, once the taxpayer requests it, will get the lien completely withdrawn from public records.
- The IRS will make it easier for taxpayers owing $25k or less, to get a tax lien withdrawn through direct debit installment agreement arrangement. The IRS has stated that taxpayers who enter into a Installment Agreement via direct debit (DDIA), or if taxpayers in a normal installment agreement already move to Direct Debit Installment Agreement (DDIA), the IRS will withdraw a tax lien. If a taxpayer already has a DDIA, then they will need to make an IRS request to have the lien withdrawn.
The financial benefits taxpayers with these tax lien changes is that less tax liens will be filed, and many other existing tax liens will be withdrawn. This will most likely allow taxpayers to get back on their feet or prevent credit deterioration as a smeared credit report with a tax lien can hurt Americans in terms of obtaining a job, mortgage, car loan, or even renting a home. This is turn should help taxpayers get into compliance and help the IRS increase their Collection Potential for taxpayers that owe. Moreover, DDIAs have a lower user fee and the normally result in higher compliance rates with taxpayers making automatic monthly tax payments.
Offer in Compromise Changes
- The IRS is expanding a new streamlined Offer In Compromise (OIC) program – With the economy taking a toll on taxpayers, the IRS intends to make it easier for taxpayers to obtain an OIC by allowing taxpayers who owe $50,000 or less and who make up to $100k to qualify for an OIC (previously was $25,000 or less). The IRS look at a taxpayers financial situation to make sure they cannot pay the tax liabilities over time or in one payment before the taxpayer can settle for less.
The financial benefits here again just like the other policy changes across IAs and tax liens it that many more taxpayers who are facing financial difficulties will be able to settle for less than they owe as long as their financial situation qualifies. This in turn should lead to more OICs being accepted and the IRS collecting tax revenue that most likely would not have been collected through normal enforcement actions.
Installment Agreement Changes
- The IRS will provide incentives for taxpayers who convert and existing non-direct debt Installment Agreemnet or setup a DDIA. This is bit of redundant as it is discussed above, but the benefits here now with an Installment Agreement is that a tax lien can be negated if the taxpayer elects to have the monthly tax payment deducted directly from their bank checking account. This will also increase compliance for many more taxpayers preventing defaults or missed payments.
- The IRS is making it easier for small businesses to obtain Streamlined Installment Agreements. A Streamlined Installment Agreement does not require a collection information statement (form 433-B for businesses), that is why they are “streamlined.” Now that a small company is not required to verify of assets, liabilities, and revenues, if they owe between $10,000 and $25,000 (previously small business had to owe $10,000 or less). However, small businesses in order to qualify will need to setup the Streamlined Installment Agreement as direct debit and be willing to pay back tax liabilities over 24 months.
The financial benefits again are that individual taxpayers can avoid tax liens or have tax liens expunged if they setup a direct debt installment agreement. This will help taxpayers regain financial strength by preventing their credit reports from being negatively impacted. Moreover, small businesses can qualify for Streamlined Installment Agreements, and both businesses and individuals will benefit from DDIAs lower user fees. However, the IRS will need to see a period of compliance with direct debit before tax liens will be withdrawn.
Overall, it seems that the IRS has listened, especially to the National Taxpayer Advocate report that was released last month. These changes will benefit the taxpayer, the IRS and the Federal government revenues overall. It will be a win win situation for all parties involved most likely.