IRS Revamps Lien Procedures to Help Struggling Taxpayers

Editor: Mark G. Cook, CPA, MBA

Procedure & Administration

Since 2008, many taxpayers have been facing unusual financial difficulties due to the economic downturn. As a corollary, some individuals and families have been unable to keep current on their tax obligations. Recognizing the resulting stress on the national economy and the impact on people, the IRS has taken actions to reduce struggling taxpayers’ tax-related burdens while still enforcing the tax law. The IRS said it believed the programs and polices would also benefit the government.

In 2008, the IRS announced an expedited process to help financially distressed homeowners avoid having a federal tax lien block refinancing a mortgage or selling a home (IR-2008-141). In February 2011, the IRS implemented new measures to further ease the tax and other financial burdens on distressed taxpayers by helping them pay back taxes and avoid tax liens (IR-2011-20).

The IRS revised tax lien filing practices and provisions to:

• Increase the dollar threshold at which liens are generally issued;
• Make it easier for taxpayers to obtain lien withdrawals after paying a tax bill;
• Withdraw liens when taxpayers enter into a direct debit installment agreement;
• Make installment agreements available to more small businesses; and
• Expand a streamlined offer in compromise program to cover more taxpayers.

Tax Lien Thresholds

In the past, the IRS would issue a lien for unpaid taxes totaling more than $5,000. However, under the new procedures the tax lien filing threshold has been increased to $10,000. The new threshold reflects inflationary changes since the last revision and will reduce the number of tax liens the IRS issues. According to the IRS, tens of thousands of people stand to benefit from the revised procedure.

However, the IRS has advised that it will not apply the new procedure retroactively, and previously filed liens will continue to be processed. In addition, the IRS said it will continue to file liens on amounts less than $10,000 when circumstances warrant. The IRS will review the results and impact of the lien threshold change within a year.

Tax Lien Withdrawals

Under certain circumstances, a taxpayer may request that a tax lien be withdrawn by filing a written application. The IRS considers withdrawals appropriate where:

• The taxpayer has made full payment of all outstanding taxes due;
• The lien was filed in error;
• The taxpayer entered into an installment agreement; or
• The IRS believes withdrawal will facilitate the tax liability’s collection or would be in the taxpayer’s and the government’s best interest.

To make the lien withdrawal process more efficient, the IRS changed its internal procedures to allow collection personnel to withdraw liens.

Direct Debit Installment Agreements and Liens

Individuals (Form 1040 filers), businesses with an income tax liability, and out-of-business entities with any type of tax debt may request a lien withdrawal after entering into a direct debit installment agreement if they meet the following requirements:

• The unpaid assessment is $25,000 or less (if it is more than $25,000, the taxpayer must pay down the balance to $25,000 to be eligible);
• The tax liability must be paid in full within 60 months or before the collection statute expires, whichever is earlier;
• The taxpayer must be in full compliance with other filing and payment requirements;
• The taxpayer must have made three consecutive direct debit payments (probationary period);
• The taxpayer cannot have previously received a lien withdrawal for the same taxes unless the withdrawal was for an improper filing of the lien; and
• The taxpayer cannot have defaulted on any current or previous direct debit installment agreement.

Taxpayers may go to the IRS website to fill out an online payment agreement and set up a direct debit installment agreement. Eligible taxpayers who are currently on a regular installment agreement may convert to a direct debit installment agreement to qualify for the lien withdrawal. However, the IRS may file a new notice of lien if the taxpayer defaults on a direct debit installment agreement after the IRS has withdrawn the original lien.

Installment Agreements and Small Businesses

The IRS also modified a payment program called the In-Business Trust Fund Express Installment Agreement to allow more small businesses to participate in installment agreements. Qualified small businesses must have employees and may file either as a sole proprietor (i.e., individual) or any legal form of business entity. The program increased the tax debt limit amount from $10,000 to $25,000, which will allow more businesses to qualify for the program. A potentially qualified small business with an outstanding tax liability of more than $25,000 must pay down the liability below the threshold amount before entering into an agreement in order to qualify. The taxpayer must pay the debt in full within 24 months or prior to the expiration of the collection statute. Furthermore, the small business must enroll in a direct debit installment agreement if the amount it owes is between $10,000 and $25,000 and must comply with all filing and payment requirements.

Offers in Compromise

The IRS has expanded a new streamlined offer in compromise program to cover a larger group of struggling taxpayers. Qualifying taxpayers include wage earners, unemployed persons, and self-employed taxpayers with no employees and gross receipts under $500,000. To participate in this expanded program, qualified taxpayers must have annual income of $100,000 or less and have less than $50,000 in outstanding tax due (previously $25,000).

To facilitate access, the new streamlined offer in compromise program requires less financial information from applicants. However, IRS employees may request additional information by phone from an applicant, if necessary. The program is intended to create greater flexibility when considering taxpayers’ ability to pay.

The IRS says it hopes that the new procedures will ease the financial pressures on all affected taxpayers while the nation as a whole tries to recover from the ongoing financial crisis.

EditorNotes

Mark Cook is a partner at SingerLewak LLP in Irvine, CA.

The editor would like to offer a special thanks to Christian J. Burgos, J.D., LL.M., for his assistance with this column.

For additional information about these items, contact Mr. Cook at (949) 261-8600, ext. 2143, or mcook@singerlewak.com.

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.