February 23, 2009
Monday

The Internal Revenue Service has announced it will be more understanding and flexible toward people who can't pay their taxes because of a layoff or other hardship.

The new policy was announced by IRS Commissioner Doug Shulman in early January, before Timothy Geithner was sworn in as head of the Treasury Department, which oversees the IRS. Geithner's failure to pay four years' worth of Social Security and Medicare taxes on time threatened his confirmation.

Shulman's announcement referred mainly to people who already owe back taxes but an IRS spokesman said it also could apply to people who can't pay their 2008 taxes.

The new policies are not designed to help chronic tax deadbeats but people "who've done the right thing in the past and are facing unusual hardships," Shulman said.

There don't appear to be hard and fast rules on who will get the kinder treatment. The IRS spokesman said it will depend on the "facts and circumstances" of each case.

People who can't pay their federal taxes face several options. The most common is an installment plan, in which the taxpayer agrees to pay the full amount due over time.

Much less common is an offer in compromise, in which the IRS agrees to take less than the full amount. To qualify, the IRS must be convinced the taxpayer does not have the income and assets needed to pay the entire debt. Payments under this plan can be made in a lump sum or monthly, usually over two years.

If a taxpayer misses a single payment on an installment agreement or an offer in compromise, the IRS can end the deal and demand the full amount due.

Under the new policy, if "previously compliant individuals in existing installment agreements" can't make their payment because of a job loss or other financial hardship, "the IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the installment agreement," Shulman said in a press release.

Likewise, "taxpayers who are unable to meet the periodic payment terms of an accepted (offer in compromise) will be able to contact the IRS office handling the offer for available options to help them avoid default," he added.

The IRS has shown such leniency in the past, but many did not know to ask for it.

"You could usually skip a month on the installment agreement if you called in advance. On the offer in compromise, you could skip a payment, but the reasons had to be good," said Richard Boggs, chief executive of Nationwide Tax Relief. "If they're going to be more lenient, that's great."

The biggest change applies to people who could not get an offer in compromise accepted because they had too much equity in their homes. In the past, the IRS would automatically reject such offers under the theory that homeowners could sell the house or take out a home-equity loan to pay their taxes due, Boggs said.

In cases "where the accuracy of local real estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate," Shulman said.

Eva Rosenberg, an enrolled agent who runs Taxmama.com, said taxpayers should still be able to prove they can't unlock their home equity to pay taxes. "If you have equity and make no attempt to get a loan or sell the home," you probably won't get the offer in compromise, she said.

In other changes, Shulman said IRS employees "will have greater authority to suspend collection actions in certain hardship cases," such as when a taxpayer has recently lost a job, is relying solely on Social Security or welfare or is facing significant medical bills.

The IRS will also have mercy on some people whose wages, Social Security checks or bank accounts are being levied to pay back taxes.

"The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons," Shulman said. Taxpayers should call the IRS number on the levy notice to discuss options.

The new policies should make it easier for most people in tax trouble to deal with the IRS without hiring a professional. Instead of paying a firm thousands of dollars to submit an offer in compromise, they should try doing it themselves and perhaps pay an attorney for an hour or two to review it. People who owe very large amounts still might need professional help.

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