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IRS announces 5 new steps for tax debtors

by on
in Small Business Tax

The IRS has instituted a series of new initiatives relating to the payment of tax liabilities. (IRS News Release 2011-20). If you read between the lines, there’s both good news and bad news on the horizon.

First, the good news: The new announcement spells out five ways that struggling taxpayers can get a “fresh start.” The changes range from a higher dollar threshold for imposing tax liens to easier ­access to many types of installment agreements.

Now, the bad news: The changes may not be all that they’re cracked up to be. According to Patrick Cox, CEO of TaxMasters, a Houston-based firm specializing in resolving tax matters with the IRS, the notion of a “kinder, gentler IRS” is mostly a mirage.

“You really need someone who knows how to challenge the IRS and how to navigate the rules,” says Cox. And there’s another pitfall that Cox warns about: Interest and penalties continue to accrue on unpaid amounts even if you have an installment agreement. In other words, the IRS generally intends to collect what it’s owed.

Keeping that in mind, here’s a quick rundown on the five new procedures presented by the IRS.

1. Tax lien thresholds: The IRS will significantly increase the dollar threshold for filing liens in keeping with inflationary changes since the number was last revised in the 1990s. In most cases, liens are automatically filed at a $5,000 threshold. The new procedures double this threshold to $10,000.

A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. Filing a “Notice of Federal Tax Lien” is required to establish priority rights against certain other creditors.

2. Tax lien withdrawals: The IRS will also modify procedures so that it’s easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the government’s best interests.

3. Direct Debit Installment Agreements and liens: For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals in several scenarios:

  • Lien withdrawals will be allowed for tax­payers entering into a Direct Debit Installment Agreement (DDIA).
  • The IRS will withdraw a lien if a taxpayer on a regular installment agreement converts to a DDIA.
  • The IRS will withdraw liens on existing DDIAs upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. Taxpayers can apply online at www.irs.gov.

4. Installment agreements and small businesses: The IRS will make streamlined installment agreements available to more small businesses. A small business with $25,000 or less in unpaid tax will be able to participate. Currently, the threshold is $10,000. Also, small businesses will have 24 months to pay.

The streamlined installment agreement will be available if you file either as an individual or a business. A small business with an unpaid assessment balance greater than $25,000 would qualify for the streamlined installment agreement if it pays down the balance to $25,000 or less after enrolling in a DDIA.

5. Offers in Compromise: The IRS will also provide a new Offer in Compromise (OIC) program to struggling taxpayers. (Details have not yet been released.) Taxpayers with annual incomes up to $100,000 will be allowed to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

An “offer in compromise” is a legal agreement settling the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer isn’t accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS assesses the taxpayer’s ability to pay based on his or her income and assets.

But Cox is dubious about the benefits of the new OIC program. As an alternative, he favors a partial pay installment agreement with only a few years to run before the end of the statutory period for collecting the debt. That way, says Cox, the matter is completely closed.

Tip: It’s likely you will need help from a tax pro if you want to work out a fair deal.

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