IRS Takes Soft Line With Tardy Taxpayers

WASHINGTON —  The nation’s tax collector is taking a softer stance on millions of Americans without the money to pay their tax bills.

“Instead of collecting nothing from people with an unpaid tax bill, we’re able to collect something,” Internal Revenue Service Commissioner Charles Rossotti said. “And for taxpayers facing severe hardship, we’ll work with them.”

The change stems from last year’s IRS reform law, which eased numerous requirements so taxpayers can work out installment plans and, in some cases, settle large debts by offering a lower compromise payment.

In addition, IRS agents are being trained to try harder to work things out with taxpayers.

“In the past, we asked them to go out and protect the government’s interest,” said Harry Manaka, IRS chief of collections. “Now, we’re telling our people that customer service and the need to protect taxpayer rights always trumps the need to collect money when they come in conflict.”

Many taxpayers do not have the money to pay Uncle Sam but are not doing anything wrong. Accountants give one primary piece of advice: File the tax return by April 15 no matter what to avoid IRS late penalties.

This year, for the first time, the IRS is permitting taxpayers to pay with several credit cards: American Express, Mastercard or Discover. Visa decided to sit out this year to see how the program went.

Paying with plastic means a steep interest rate, sometimes 18% or higher. A bank loan is an alternative, but people who cannot get one may turn to the IRS for an installment agreement at an interest rate now at 8%.

Beginning this year, the IRS guarantees that a taxpayer with a debt of $25,000 or less will be able to pay in installments for up to five years with little extra paperwork. Previously, the debt was $10,000 with a three-year payment window.

Taxpayers who get these installment agreements will avoid an IRS lien, which can drastically affect a person’s credit and ability to get loans.

Last year, under the old rules, 2.8 million taxpayers had IRS installment plans to pay their taxes. But some people have tax liability too high to pay that way, particularly those involved in difficult situations such as a failing business or a messy divorce.

For those taxpayers, the IRS has a program called “offers in compromise” in which payment for a lower amount is negotiated with the agency. For years, however, the program had stringent paperwork requirements that frequently meant people got turned down, even if the problem was something as simple as a missing signature.

In 1998, only 25,052 out of 105,255 offers were accepted.

“We were very, very finicky about only accepting what we considered perfect offer forms. We would reject them before we even started to look at the merits,” Manaka said.

In addition, the IRS is expanding the financial data its agents will use to determine a proper tax payment compromise, such as a person’s future earning power. Only agents trained specifically in negotiating these deals will handle them, instead of the jack-of-all-trades approach of the past.

Phil Brand, a former IRS compliance chief now with the KPMG accounting firm, said the new offer-in-compromise system should “at least make sure the person gets a fair hearing.”

The IRS reform law also set up new appeal rights and other protections for people who find themselves owing taxes, such as a requirement that a judge give permission before the agency tries to seize someone’s house.

Perhaps the biggest key is changing the attitude of IRS agents. Manaka said that will take time, but the agency has instituted a new system of grading performance that moves away from dollar and numerical collection goals.

“We’re trying to involve the taxpayer more and listen to the taxpayer,” he said. “That is a major change in philosophy.”