The Taxpayer Advocate's 2010 annual report to congress describes continuing concern that IRS collection practices inflict unnecessary harm on financially struggling taxpayers and fail to achieve the IRS’s overriding objective of increasing long-term voluntary compliance with the tax laws. “Tax collection requires a delicate balancing of the government’s interest in collecting revenue and ensuring that all taxpayers pay their fair share of tax, on the one hand, and protecting financially struggling taxpayers from unnecessary harm, on the other,” Olson said. “Current IRS policies do very little balancing. For example, IRS lien filing policies are all about ‘protecting the government’s interest’ and don’t consider the impact on the taxpayer.”
Financial Impact of Tax Liens. In FY 2010, the IRS filed liens against 1.1 million taxpayers. When the IRS files a notice of federal tax lien, the taxpayer’s creditworthiness can be badly damaged for the long term. Lien filings are picked up by the three credit rating agencies and remain on the taxpayer’s credit report for seven years from the date a tax liability is resolved, or longer if it is not resolved. ”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,” Olson said. A tax lien can be particularly devastating to small businesses, as it often cuts off their access to credit.
Several Million Taxpayers Affected. Over the past seven years, the IRS has filed more than five million tax liens. The report says that despite the high unemployment rate and the unusually large number of Americans who are experiencing financial difficulties, the IRS is continuing to ramp up the number of tax liens it files each year. The 1.1 million liens filed in FY 2010 compare with 168,000 in FY 1999, an increase of 550 percent.
Revenue Benefits of Tax Liens Unknown. The IRS does not have data that show whether, or to what extent, liens further revenue collection. A TAS study conducted in 2009 suggests there is a possibility that lien filings may reduce long-term tax collection. Notably, over the same period that lien filings have increased by 550 percent, annual revenue collected by the IRS’s Collection function on an inflation-adjusted basis has remained flat. “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,” Olson said. “Absent data that show liens make a meaningful contribution to revenue collection and especially in this economy, I find it unacceptable that the IRS continues to torment financially struggling taxpayers in this way.”
Broader Use of Collection Alternatives Recommended. The report states that the IRS has taken steps in the last year to reassess its collection policies but concludes that more steps should be taken quickly. The report reiterates the Advocate’s longstanding suggestion that the IRS make greater use of collection alternatives, such as offers in compromise, when dealing with taxpayers who cannot afford to pay their liabilities in full. A comprehensive assessment of the IRS’s collection policy and a suggested road map toward a more effective approach are presented in Volume 2 of the report.