Category Archives: Tax Lien

Credit Bureaus to Lessen Impact of Federal Tax Liens

For many years, there has been one thing that taxpayers can count on when taxes are owed to the Internal Revenue Service (IRS): A Notice of Federal Tax Lien (NFTL) being filed. While the NFTL is primarily used by the IRS to secure its liability against a taxpayer’s right, title and interest in property it has also become a rather harsh reflection of one’s credit worthiness, something many consumer advocates have strong opposition to.

With that said, big changes may be on the horizon for taxpayers that owe the IRS unpaid taxes. Recent reports indicate that the credit industry is on the verge of adopting new rules that could minimize—or do away with altogether—the negative impact tax liens have on credit scores. This is a noteworthy departure from current procedure in which tax liens cost taxpayers significant credit points.

On July 12, 2016, according to a post on Credit.com, as part of its National Consumer Assistance Plan (the result of a settlement brokered with 31 state attorneys general back in 2015), Equifax, Experian and TransUnion are planning to significantly reduce the amount of tax-lien and civil-judgment information found in consumer credit files. Details have yet to be finalized, but “there will be less of that type of data in credit reports moving forward,” according to Stuart K. Pratt, president and CEO of the Consumer Data Industry Association, a trade association that represents the credit bureaus, confirmed to Credit.com. Testing is currently underway and a final plan regarding the information is expected to be implemented in July 2017.

 

If we rewind back to 2011, the IRS announced its own attempt at mitigating some of the negative impacts of NFTLs through the Fresh Start Initiative. According to an IRS press release at the time, “The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers. Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens.” The changes to lien protocol did not, of course, change the way that a lien would be scored in by the credit reporting process. Instead, the Fresh Start Initiative was a collection of procedural changes that provided more alternatives to the traditional lien process.

Interestingly, studies show that the filing of an NFTL by the IRS actually assists in the collection of tax dollars. And yet despite this factual evidence, the IRS has chosen a course of action that yields far fewer notices of liens than any time in the past decade. Still, the proposed changes by the credit bureaus must give the IRS pause for additional thought into the subject. At this point, only time will tell exactly how the rules are changed within the credit industry and we should get a better idea towards the end of this year and in to 2017—observers will want to continue to pay attention to the IRS’ response. It’s only been five years since the IRS’ Fresh Strat Initiative lien changes and there are no significant IRS budget increases on the horizon. It seems unlikely that any major shifts will occur within the IRS as a result of the credit bureaus changing their rules.

Tax Debt May Affect Your Credit Rating

A recent report by the GAO (Government Accountability Office) is being considered, which investigates the pros and cons of letting the IRS report tax debt to credit bureaus. At present, although the IRS can file tax liens on tax debts, which are then reported by credit bureaus, the IRS cannot directly report tax liability. This is due to privacy laws surrounding the information collected by the IRS.

The report explains that, at the end of 2011, approximately $373 billion was owed to the IRS by businesses and individuals. While this is a staggering amount, breaking the figure down tells a slightly different story. Approximately half the number of people in debt owed less than $5,000, but the aggregate debt tends to be with those owing large amounts, so this still adds up to $310 billion of the total. However, some of these debts were already in the collection process, where taxpayers were disputing the amount owed, or had already organized payment plans. Approximately one-third of the amount had already been identified by the IRS as uncollectible. Additionally, over half of the total amount was already subject to liens, so was already being indirectly reported to credit bureaus.

The thought process behind reporting debts to credit bureaus is to try to reduce the tax debt inventory – the hope being that directly reporting tax debts would encourage more businesses and individuals to be compliant with the tax obligations. Of course, on the contrary, it might instead encourage more tax payers to falsify their returns so that their real tax debt does not impact their credit rating. The resulting adverse credit ratings might also create borrowing difficulties for taxpayers that would find third party loans to clear their tax liability.

Another factor that was included within the report was the importance of ensuring data accuracy. While the IRS is continually trying to improve its systems, mistakes already happen. You only have to look at the increasing levels of successful fraudulent tax returns to see how badly some IRS processes are coping. Any errors in reporting debt to credit bureaus could create extreme hardship for innocent taxpayers, who could be denied credit, employment, or housing as a result.

While there may be some advantages to direct report of tax debt, the IRS already has an indirect process in place through the filing of liens. 20/20 Tax Resolution has noticed a significant reduction in the number of liens being filed during 2012, though this does not seem to correlate with any reduction in the number or level of tax debt. Perhaps the IRS simply needs to improve internal systems and make better use of the collection activities already available before considering new legislation.