By Sidney Kess, CPA, J.D., LL.M & Christopher M. Ferguson, J.D.
The tough economy may be easing, but it isn’t over for many taxpayers. In an effort to provide help to those who are struggling, the IRS has announced changes to its lien process and certain other actions that can help taxpayers who are trying to work their way out of financial difficulty, including their tax problems.
Background
The IRS issues more than 600,000 federal tax liens each year. Several years ago when the recession first took hold, the IRS initiated relief for homeowners who had liens placed on their residences (IR-2008-141, 12/16/08). That program expedited the process of removing a lien to make it easier for distressed homeowners to refinance their mortgages or sell their homes. The options:
- Taxpayers who were looking to refinance their home mortgage could request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan.
- Taxpayers who were looking to sell their homes for less than the amount of the mortgage (i.e., homeowners “under water”) could request that the IRS discharge its claim.
The following year, the IRS added other assistance for financially-distressed taxpayers (IR-2009-9, 1/16/09). These included such measures as flexibility for missed payments by taxpayers paying off back taxes on an installment payment agreement and additional review of home values for those requesting an Offer in Compromise.
Now, the IRS has announced a new round of initiatives to help certain taxpayers who are experiencing financial difficulties.
Changes in the IRS Lien Process
The IRS can obtain liens on taxpayers’ property in order to secure payment of outstanding taxes. By filing a Notice of Federal Tax Lien, the government obtains priority rights to collect back taxes versus claims by certain other creditors. Tax liens, however, can be an impediment for struggling taxpayers to get back on their feet; it hinders their ability to do just about anything that can be impacted by their FICO score (a credit score based on an individual’s credit history), such as borrow money, buy or rent a home, buy or lease a car, or even get a job.
In recognition of the impact of liens on financially-challenged taxpayers, the IRS has announced favorable revisions to its lien process (IR-2011-20, 2/24/11).
Tax lien threshold. The IRS has promised to significantly raise the dollar threshold for obtaining liens. The new limits will reflect cost-of-living increases and should be announced early in 2012.
Tax lien withdrawal. A tax lien is not lifted until the tax bill has been satisfied. However, the IRS has promised to change the procedures so that it is easier to obtain a lien withdrawal. Under the new procedure, the lien will be withdrawn once full payment has been made and the taxpayer requests that the lien be lifted. As part of the revised procedure, IRS collection personnel will be allowed to withdraw the lien. The IRS will issue a Release of the Notice of Federal Tax Lien within 30 days after the tax due (plus interest and any penalties) has been paid or within 30 days after the IRS accepts a bond guaranteeing payment of the tax.
Even better, taxpayers who have an unpaid tax bill of $25,000 or less and have a Direct Debit Installment Agreement may have the lien withdrawn before full payment is made. The IRS will set a probationary period during which the taxpayer must demonstrate repayment of outstanding taxes. Once this period has passed, the lien will be withdrawn.
The Online Payment Agreement application at IRS.gov can be used to set-up with Direct Debit Installment Agreements. Those who have outstanding installment agreements can convert to a Direct Debit Installment Agreement in order to have the lien withdrawn.
Details about requesting the release of a federal tax lien can be found in IRS Publication 1450, Request for Release of Federal Tax Lien, at irs.gov.
Small Business Installment Agreements
Taxpayers who cannot pay their tax bill in a lump sum may be able to obtain an installment agreement to spread their payments over time. A Streamlined Installment Agreement is available to taxpayers who meet four requirements:
- They have filed all necessary tax returns;
- The amount owed does not exceed a threshold amount $25,000;
- They did not acquire the tax debt more than five years ago; and
- They will be able to make monthly payments to pay off the tax debt in 60 months or less.
The minimum monthly payment amount usually is the balance due divided by 60 months. This is then adjusted upward by as much as 20% for interest and penalties with respect to the taxes due. For example, assume that an individual owes $12,000 in back taxes. The monthly payment amount likely will be $240 ($12,000/60 months + 20% of $200).
In recognition of the importance of small businesses to the U.S. economy, the IRS has promised to Streamline Installment Agreements for these small businesses (IR-2011-20, 2/24/11). In the past, only small businesses with outstanding tax debt under $10,000 could participate in this program; the threshold has now been raised to $25,000 or less in unpaid taxes. Those with balances in excess of the new limit can qualify for a Streamlined Installment Agreement by paying down their debt so that they fall within the $25,000 limit.
To use the Streamlined Installment Agreement, small businesses must use a Debit Installment Agreement. The period for paying the small business’ taxes due is limited to 24 months, rather than the 60 months available to individual taxpayers.
Offers in Compromise
Taxpayers who do not believe they can or will ever be able to pay all of their outstanding tax bills or do not believe that the amount that the IRS claims they owe is correct can offer to pay a reduced amount through a process called Offer in Compromise (OIC). The offer is not automatically accepted, but there has been increasing pressure put on the IRS (especially by the National Taxpayer Advocate in her 2010 Annual Report at www.irs.gov/pub/irs-utl/arcdedication_preface_toc.pdf) to make the process more taxpayer-friendly and more widely utilized.
Those requesting an OIC must file Form 656, Offer in Compromise, when there is doubt that the outstanding amount can be collected in full through a lump sum or an installment agreement, or Form 656-L, Offer in Compromise (Doubt as to Liability), when it is believed that the tax liability is incorrect. In addition, usually Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B, Collection Information Statement for Businesses, must also be submitted. However, these forms are not required when an OIC is made solely as to doubt as to liability. Details about the OIC process are explained in Form 656-B, Offer in Compromise Booklet.
There is a streamlined OIC process for certain taxpayers, which has undergone some favorable changes (IR-2011-20, 2/24/11). The IRS has now increased the threshold of eligibility for the streamlined OIC to cover taxpayers with annual incomes up to $100,000. To participate, taxpayers must have tax liability of less than $50,000; the prior limit had been $25,000.
Comments powered by CComment