IRS Eases Debt Rules

In a rare show of leniency, the Internal Revenue Service on Thursday announced new rules designed to make it easier for people struggling with tax debts to climb out of the hole.

Among the changes, the IRS said it would place fewer claims on taxpayers' property and would make such "liens" less damaging to taxpayers' credit ratings. Other changes are intended to help small businesses and forgive debts of more people who are unable to pay.

Commissioner Doug Shulman called the changes an effort to "stand in taxpayers' shoes" following "the worst recession in a generation."

"This is a real effort to consider taxpayers' needs," said Benson Goldstein, a tax expert with the American Institute of CPAs.

Nina Olson, the National Taxpayer Advocate tapped by Congress to monitor the IRS, was more muted in her response. She called the changes "a significant step in the right direction," but added that "they are not sufficient to address the problems we have seen."

The changes affecting the largest number of taxpayers concern liens, or notices that give the IRS a legal claim to a taxpayer's property in the amount of an unpaid tax debt. The new rules generally prohibit the IRS from filing a lien unless unpaid taxes exceed $10,000, doubling the previous limit, which had been in effect since the mid-1980s.

The IRS also will ease the damage to taxpayers' credit scores after the full amount of the debt is paid. In an important technical move, the agency will grant more taxpayers "lien withdrawals"—a higher level of forgiveness than the current "lien release."

According to Ms. Olson, full withdrawal is often better for taxpayers' credit ratings because it expunges the lien from the record immediately, whereas a release leaves it on the record for at least seven years. A tax lien can knock 100 points off a person's credit score. The highest credit score is 850 at FICO, a leading credit scorer. Borrowers often need a score in the 700s to qualify for the best rates on loans.

In addition, liens now may qualify for full withdrawal even if the debt isn't fully paid, so long as the amount is less than $25,000 and the taxpayer enters into a "direct debit installment agreement."

This typically allows the IRS to make an automatic monthly withdrawal of a scheduled payment from the delinquent taxpayer's bank account. Taxpayers may apply for a direct debit agreement online at www.irs.gov.

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