IRS Tax Liens Grow, Data Does Not Justify Enforcement Action

The Taxpayer Advocate Service is an independent organization within the IRS whose duties include resolving tax problems and making sure they don’t happen in the future. Yesterday, the Taxpayer Advocate Service released an annual report with many administrative and legislative recommendations.

IRS Tax Liens Grow

Among other things, the report voiced concern over the fact that the IRS recently has stepped up its use of collection mechanisms, including using tax liens, in order to secure repayment of IRS back taxes or taxes owed.  In 2010, the IRS filed liens against about 1.1 million taxpayers, which is a 14% increase from 2009. Even worse, tax liens from fiscal year 1999 have grown about 554% from 168k to 966k in 2010.

Do Slight Revenue Gains Justify the Filing of Tax Liens?

One would assume that tax revenues would dramatically rise with the increased use of tax liens. However, although millions of NFTLs (Notices of Federal Tax Lien) have been filed since 1999, revenues have only increased by about 4%. Yes, only 4%. This shows clearly, that tax liens are not a very effective way for the IRS to collect back taxes. One could argue that the tax liens led to a 4% revenue increase (inflation-adjusted) which is consistent with previous IRS studies that support the notion that tax liens have a positive impact on tax collections. The effect may be marginally positive from a short-term revenue perspective, but how about from a long-term revenue perspective?
On the contrary, the IRS may like many other government organizations, maybe failing to see the unintended consequences that tax liens and other stiff enforcement actions have on the greater economy, and the individual’s future payment and filing compliance.  Nina Olson, a National Taxpayer Advocate highlights these unintended consequences, “By filing a lien against a taxpayer with no money and no assets, the IRS often collects nothing, yet it inflicts long-term harm on the taxpayer by making it harder for him to get back on his feet when he does get a job.

From an economic standpoint, tax liens do not help those out of work with tax liens, get new jobs, as many employers run credit checks and background checks on employees. The fact is, a tax lien can stay on a person’s credit for many years. Tax liens make it harder for the unemployed to find jobs, borrow, as well as be approved to rent a home or apartment. Nina Olson, brings up this point by stating, “Increasingly, employers, mortgage lenders, landlords, car dealerships, auto insurance companies, and credit card issuers utilize credit reports, so a tax lien has the potential to render someone unemployable, unable to obtain housing (owned or rented), and unable to obtain car insurance or a credit card, at least at reasonable rates, for many years into the future.” Therefore, the IRS needs to consider long-term consequences of tax liens on revenue and taxpayer compliance.

The TAS has recommended that new studies be performed, and especially consider the automatic issuance of Notices of Federal Tax Liens against taxpayers who are “currently not collectible,” due to financial hardship.