By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, January 5, 2011; 7:52 PM
The Internal Revenue Service's increasing use of "hard-core" collection tactics "is inflicting unnecessary harm on financially struggling taxpayers," an in-house critic at the IRS said Wednesday.
The IRS routinely imposes liens on delinquent taxpayers, thereby damaging their credit scores and potentially jeopardizing their access to jobs, insurance and even rental housing, National Taxpayer Advocate Nina E. Olson said in an annual report to Congress.
By making it harder for taxpayers to get back on their feet, the IRS might actually reduce long-term tax collections, Olson wrote.
Olson serves as an independent ombudsman within the IRS, and her office helps taxpayers resolve problems with the agency.
She has complained about indiscriminate use of liens in the past but emphasized the issue in her latest report, saying the IRS has refused to moderate its practices "despite the worst economy in at least a generation."
Though lien filings have soared over the past 11 years, revenue brought in through the IRS collection program "has remained flat," Olson wrote.
The IRS filed 1.1 million tax liens in the 2010 fiscal year, nearly double the 522,887 it filed in fiscal 2005. The number has risen sharply amid the high unemployment, recession and real estate crisis of recent years.
IRS spokesman Terry L. Lemons said the agency recognizes that many taxpayers are struggling financially and has offered them greater flexibility over the past two years.
As it collects money to pay the government's bills, the IRS must juggle potentially competing concerns - Making sure those who pay what they owe are not unfairly shouldering the burden for others, but not squeezing delinquent taxpayers beyond reason, either.
A tax lien is a legal claim the government files against a taxpayer's property to secure payment of money owed.
The IRS automatically files liens on delinquent taxpayers who owe $5,000 or more, but it is preparing to test what will happen if it uses liens more sparingly, IRS spokesman Frank Keith said. Under the pilot programs, the IRS will raise the dollar threshold and refrain from filing liens on taxpayers who have "no real property," Keith said.
In addition, the IRS will put in place procedures to withdraw liens when taxpayers have paid their debts to the IRS and can show that the liens are causing them harm, Keith said.
The IRS has argued that liens are essential to establishing the government's priority over other creditors. That increases the odds that the government will collect when the taxpayer owes money to multiple parties but has too little to pay them all.
Even if the taxpayer has no assets, filing a lien is a sound approach because it establishes the government's claim against future assets, the IRS has argued.
Some taxpayers might pay because they are motivated by the threat of a lien, the IRS has said.
Like foreclosures, bankruptcy filings and other increasingly common stains on consumer credit reports, liens illustrate how the financial setbacks of recent years can continue to take a toll on consumers for years.
Olson said the IRS should make greater use of alternative strategies, such as assessing cases individually and striking compromises with taxpayers who cannot afford to pay in full.
That would be more time-consuming and labor intensive for the IRS, but Olson has accused the agency of relying too heavily on an automated "one-size-fits-all approach." She said the agency misguidedly files liens against people who have no money and no assets.
"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," Olson wrote in a news release accompanying the report.
Olson also called for simplification of the tax code, saying it is so complex that the IRS has difficulty administering it.
Though about 90 percent of taxpayers rely on professional preparers or tax software packages to complete their returns, the IRS received 110 million calls in each of the past two fiscal years and was unable to answer more than 25 percent of them, Olson wrote.
Individual taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements, and the financial burden on the typical taxpayer comes to $258 annually, Olson's office reported.