About Real Estate: IRS to ease aggressive use of tax liens on homeowners

Federal liens against the homes of delinquent taxpayers have skyrocketed in recent years, but the Internal Revenue Service is backing down and making it easier for owners to settle their unpaid bill.

Q. The Internal Revenue Service sent me a letter last month stating it intends to place a lien on my home for an unpaid income-tax bill from a few years ago. However, I heard a short radio report on Tuesday that said the IRS plans to stop filing tax liens. Is this true?

A. The IRS will continue to file tax liens for unpaid income taxes, but it recently announced some major changes that should slow its lien placements and benefit millions of homeowners and businesses that already have had a lien placed on their property or may face one in the future.

The changes come after some members of Congress, a number of consumer-advocacy groups and even the IRS’s in-house consumer watchdog criticized the agency for aggressively stepping up its placement of tax liens at a time when the real estate market is in a slump and the economy is sputtering.

More than 4 million households are delinquent on their federal income taxes, according to government statistics. The IRS filed more than 1 million tax liens in the 12 months ending last September, a nearly sixfold increase from a decade earlier.

I’m devoting this entire column to answering some of the common questions about the agency’s changes.

Q. How do tax liens work?

A. A tax lien is a legal document that the IRS can file against the title to a home when the owner owes back taxes. It effectively gives the agency a partial interest in the property and remains on the title until the bill is paid off, usually from the homeowner’s savings, or proceeds of a refinancing or sale.

Q. Why has the IRS been increasing its lien activity?

A. Ostensibly because it wants to discourage future tax scofflaws and generate more cash for the debt-ridden Treasury. But even Nina E. Olson of the National Taxpayer Advocate, the consumer watchdog that’s technically part of the IRS but works independently, complains that the agency has no data to suggest that the huge jump in lien filings has generated any extra money for Uncle Sam.

After filing a lien, “The IRS often collects nothing, yet it inflicts long-term harm on the taxpayer,” Olson wrote in her latest annual report to Congress.

Indeed, a tax lien can take a heavy financial toll on a homeowner. The sharp drop in home prices has made it impossible for many borrowers to refinance and pull cash out of the deal to pay off their unpaid tax bill, while the high jobless rate has left many others struggling to stay current. Yet penalty and interest charges by the IRS keep mounting.

The liens also are picked up by the nation’s credit bureaus. The homeowner’s credit rating then nose-dives, making it even harder to get a loan to pay Uncle Sam — or to get a new job, because many employers now check an applicant’s credit report before making a hiring decision.

Q. What are the key changes?

A. There are several. For starters, the IRS will double its threshold for filing “automatic” tax liens, to $10,000 from the current $5,000. That will help many owners whose debt is under five figures, in part because it will give them more time to pay their bill or work out a tax settlement.

In a related move, the agency also will expand its “offer-in-compromise” program by allowing people who earn up to $100,000 a year to participate. The current limit is $50,000.

Q: How does the offer-in-compromise program work?

A. It allows individuals and small businesses that truly cannot repay their back taxes to settle for less than the amount owed. To be eligible, the unpaid debt must be $25,000 or less.

Q. A tax lien was recently filed against my home, and it has already ruined my credit score. Are there any changes that will help me?

A. It depends on what you do next.

Currently, when most tax liens are paid off, the IRS files a “lien release” that will stay on the owner’s credit record for seven years. The new measures will make it easier for an owner to instead obtain what the agency calls a “lien withdrawal.” A withdrawal is much better because it is treated as if the lien had never been filed and is removed from the taxpayer’s credit record.

Most liens will now be considered withdrawn rather than released when the back taxes are paid in full. In an equally important change, a withdrawal also will quickly be issued if a homeowner agrees to an installment plan that allows the IRS to automatically debit the future monthly payments from a bank account — again, provided the unpaid debt is $25,000 or less.

Q. Where can I get more information about the changes?

A. Your best bet is to talk to an accountant, tax attorney or similar professional. If you don’t know one, ask friends and relatives for a referral.

You could contact a firm that specializes in IRS settlement negotiations, but be wary: Many charge large upfront fees but will not guarantee their success.

Check the firm’s reputation by calling the local Better Business Bureau. Also type the firm’s name into Google or another Internet search engine, followed by the word “complaint.”

The results may shock you.

Ÿ For the booklet #147;Straight Talk About Living Trusts,#148; send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.

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