Last year I wrote about how the IRS policy on filing . Tax liens are truly a double whammy. Not only do you owe the IRS (which is bad enough) but you may also find your credit destroyed for years by a tax lien on your credit reports.
This time, I have good news: the IRS is implementing new policies that ease up on tax liens. This can make a tremendous difference for millions of Americans.
Before this change, if you got a bill from the IRS saying you owed $5000 or more and couldn’t come up with the money to pay it right away, the IRS would file a Notice of Federal Tax Lien which would then be picked up by the major credit reporting agencies and appear on your credit reports. A tax lien can drop your FICO credit scores by as much as 200 points, and could result in your current lenders closing your lines of credit or credit cards. Even worse, under the Fair Credit Reporting Act (which applies to personal credit reports, not business credit reports), they remain on credit reports for seven years after they are paid or satisfied.
In short, tax liens are really, really bad.
Nina E. Olson, the Taxpayer Advocate, has repeatedly criticized this policy in her reports to Congress, and warned that there is no evidence that tax liens help the IRS collect past due taxes. In fact, they may hamper IRS collection efforts by destroying credit ratings and making it impossible to credit to pay off the tax debt. Someone must have been listening.
Under guidelines recently announced by the IRS, there will be new options for avoiding tax liens and for getting them removed once the debt is paid.
Higher threshold: The IRS has raised the threshold for filing tax liens from $5000 to $10,000, and that figure will be reviewed again in a year. That means the IRS will not automatically file a lien if you owe less than $10,000.
Removing liens: Once you’ve paid your tax debt in full, you can request that the lien be removed. This wipes the slate clean on that problem, and allows you to rebuild credit. (It remains to be seen how easy the process will be, but I’ll try to remain optimistic for the moment.)
You may not even have to pay off the tax debt to have the lien removed. If you owe $25,000 or less and enroll in a Direct Debit Installment Agreement (so that your installment payments are taken out of your bank account each month), you can ask for the tax lien to be removed. The IRS make sure they successfully collect a few payments first, but once you're over that hurdle, you can request the lien removal. If you are already on an installment agreement, you can ask to convert to a Direct Debit Installment Agreement to take advantage of this initiative.
And here’s a change aimed squarely at small businesses: Those who owe the IRS $25,000 or less (up from $10,000 previously) can participated in a Streamlined Installment Agreement, as long as they can pay off the tax they owe in two years or less. The benefit to the streamlined agreement is that it doesn’t require a financial statement. If you want to go this route, you must enroll in a Direct Debit Installment Agreement.
Finally, the IRS says it will offer a new “streamlined Offer in Compromise (OIC) program.” An offer-in-compromise is a basically a settlement that allows you to pay less than the full amount you owe. You won't be eligible for one if the IRS believes you can pay the full amount in a lump sum or through a payment agreement. But if you qualify, the new program allows taxpayers who earn up to $100,000 annually to resolve a tax bill of $50,000 or less through an OIC.
Olson doesn't seem to be completely enamored with these changes. The says these programs don’t go far enough, and she certainly knows better than I do the challenges facing taxpayers. I hope these new policies make a signifant difference. Until I see otherwise, I am relieved that taxpayers have at least a fighting chance to get tax liens off their credit reports and rebuild their credit.
Has a tax lien destroyed your credit? Do you think this new policy will help? Feel free to share your story below.
Helping entrepreneurs and individuals find reliable answers to their credit questions has been the theme of Gerri Detweiler's work for the past two decades. She is the co-author of five books including Business Credit Success: Get on the Financing Fast Track, and she serves as personal finance expert for Credit.com.
