Wednesday, March 2, 2011

Liens, levies against taxpayers rise sharply

By Carol Hazard

So much for a "kinder, gentler IRS." That went out years ago, tax experts say.

The Internal Revenue Service continues to ramp up the number of tax liens and levies it files against taxpayers, despite a high number of Americans who are unable to pay their taxes.

The government agency filed liens against 1.1 million taxpayers last year, up from 168,000 in 1999, according to the IRS website. In the past seven years, it has filed more than 5 million tax liens.

The IRS doesn't break out data for specific areas such as Richmond. However, a nonprofit here — The Community Tax Law Project — saw its caseload of helping low- and middle-income taxpayers resolve tax disputes jump 58 percent last year from the previous year.

Private practices are dealing with the same issues.

"We are seeing the number of notices balloon and audits increase," said Frances F. Goldman, an attorney, accountant and owner of The Tax Complex in Henrico County and president of The Community Tax Law Project.

"Very few taxpayers set out to cheat the government. They are afraid of the IRS. They don't want to get into a quagmire," she said. "Once something goes wrong, it seems to go on and on. The penalties and interest build and, before you know it, you've got thousands of dollars of interest and penalties that are larger than the original tax bill."

The IRS notched up its collection efforts beginning in 2006, according to data on the agency's website.

"In the mid-2000s, the government needed money, so quietly the word got out to improve the system, get more automated and get more money in the door," Goldman said.

The IRS is going after anyone who owes money, not just the wealthy who may have found loopholes or people who hide money in offshore accounts, and the practice is inflicting unnecessary harm, according to National Taxpayer Advocate Nina E. Olson, who works for an independent arm of the IRS.

"By filing a lien against a taxpayer with no money and no assets, the IRS often collects nothing, yet it inflicts long-term harm on the taxpayer by making it harder for him to get back on his feet when he does get a job," Olson said in recent testimony before Congress.

She noted that despite the high unemployment rate, the IRS continues to increase the number of tax liens it files each year.

"Tax collection requires a delicate balancing of the government's interest in collecting revenue and ensuring that all taxpayers pay their fair share of tax … and protecting financially struggling taxpayers from unnecessary harm," Olson testified.

Tax liens damage a taxpayer's credit and remain on a person's credit report for seven years from the time the tax liability is resolved or longer if it is not resolved, Olson said. "A tax lien can be particularly devastating to small businesses, as it often cuts off their access to credit."

The IRS told the Richmond Times-Dispatch that it recognizes that many taxpayers are struggling financially.

"The IRS has taken numerous steps to help taxpayers facing tough times in the past two years," according to the statement. In some cases, the IRS will agree to settle taxpayer liabilities for less than the full amounts owed.

The IRS is implementing procedures to withdraw tax liens after the underlying tax has been paid. "This new lien-withdrawal process will help struggling taxpayers who face hardship caused by having a lien, such as securing a job or financing," the IRS said.

Demand for services at The Community Tax Law Project has reached all-time highs, requiring that the clinic impose moratoriums on accepting new clients, said Elaine Javonovich, executive director of the clinic.

Business owners whose companies went sour may have lost their houses and their savings, Javonovich said. They can't pay their self-employment taxes, and they still owe the money, she said.

Taxpayers may owe taxes on debt that was forgiven. Or people may have lost their jobs and withdrawn money from their retirement accounts. Early withdrawals are subject to regular taxes and penalties.

"We are seeing the whole gamut of stories that come out of an economic downturn," said Paul Harrison, an enrolled agent with The Community Tax Law Project.

The local nonprofit was founded by Olson, the taxpayer advocate, in 1992. It relies on a network of 150 volunteer lawyers, accountants and enrolled agents to help low- and middle-income taxpayers resolve tax disputes.

"American taxpayers can be quite proud, 80 percent to 85 percent of us voluntarily comply with federal income tax laws," Harrison said.

But many people facing deteriorating financial situations simply cannot pay their tax debts, he said.

Others being targeted for enforcement are elderly and disabled taxpayers, tax advisers say. The IRS can garnish up to 15 percent of Social Security payments. The practice is supposed to stop this year if a person's sole source of income is Social Security.

"The IRS has historically tried to enforce the tax laws even-handedly," Harrison said. "No taxpayer is too big. No taxpayer is too small."

On one level, garnishing Social Security payments makes sense, he said. "Why should the government pay money to people who owe the government money?

"But the prospects of taking 15 percent of fixed income may be overdoing it in some cases. For people on fixed incomes where every penny is spent on rent, food and utilities, this is a major upheaval."

Some people may have under-reported their income and legitimately owe the money. But errors are made, whether by the taxpayer, the IRS, the Virginia Department of Taxation or a reporting company, tax experts say.

And taxpayers often can't get the matter resolved by themselves, experts say.

The IRS has become more automated and, when documents don't match, accounts are flagged and notices are mailed to taxpayers about discrepancies.

Backup documentation may be needed to support a claim. But in half the cases, the error is with the IRS, Goldman said. The tax law is so complex that the agency's automated system doesn't always read returns correctly, she said.

One recent case at The Community Tax Law Project involved a senior who lives in Richmond's East End. He retired from Reynolds Metals Co. in 2000 — the same year that the company was bought by Alcoa Inc.

Some Reynolds retirement plans were merged into an Alcoa fund. However, instead of reporting this account as a rollover, the company mistakenly classified it as a distribution.

The IRS claimed the retiree owed income taxes on the full amount and garnished his Social Security payments, Harrison said. The situation took a year to resolve, he said.

"The layperson trying to deal with the IRS is at a significant disadvantage," Harrison said.

When taxpayers call the IRS, they typically speak with a customer service representative who is trained to respond to general questions. "They are not tax experts," Harrison said.

In Olson's 2010 report to Congress, she said the IRS receives "a staggering" 110 million calls a year and was unable to answer more than 25 percent of those calls.

She said the IRS cannot process on a timely basis more than 11 million pieces of taxpayer correspondence it receives each year. The situation leads to erroneous tax assessments and improper collection actions, Olson said.

Dealing with the IRS can be intimidating, Harrison said. The general thinking is that the taxpayer is in trouble with a large bureaucracy that has the power to take things away from them, he said.

To file a lien or claim against someone's property, an individual or company must file a lawsuit against the person owing money and go to court. The IRS can file a lien without filing suit or going before a judge.

The IRS also can seize property for unpaid taxes and impose levies, garnishing wages or money from bank accounts.

In general, the IRS sends a series of notices, each getting more urgent, trying to get the taxpayer to respond with a phone call to work out a payment arrangement. If that process is unsuccessful, the IRS starts enforcement actions.

"It's easier to push the lien or levy buttons than it is to work with someone to set up a payment plan," said Elizabeth Atkinson, an attorney with LeClair Ryan who was a revenue officer for the IRS in the 1980s and 1990s.

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