The National Taxpayer Advocate accused the Internal Revenue Service of using tax liens to inflict unnecessary harm on financially struggling taxpayers in a January 2011 report to Congress.
The taxpayer advocate called the use of tax liens amid high unemployment and a faltering economy "torment," and said the practice is not effective in collecting back taxes.
"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," National Taxpayer Advocate Nina E. Olson said.
"Absent data that show liens make a meaningful contribution to revenue collection and especially in this economy, I find it unacceptable that the IRS continues to torment financially struggling taxpayers in this way."
Tax Lien Definition
The filing of tax lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. A tax lien serves as a public notice to other creditors that the government has a claim on the property.
Tax liens appear on credit reports and can remain there for up to seven years, meaning that they can prevent consumers from getting approved for loans, credit cards, apartment rentals and even jobs.
Number of Tax Lines Rises
The number of tax liens filed by the Internal Revenue Service increased even as the ability of Americans who owed back taxes lost their ability to pay up, largely because of skyrocketing unemployment.
The IRS filed 1.1 million tax liens against American taxpayers in the 2010 fiscal year, up 14 percent over 2009, according to the National Taxpayer Advocate, an independent organization within the IRS that helps taxpayers who are experiencing economic harm.
By comparison, the IRS filed only 168,000 tax liens in 1999.
Harm of Tax Liens on Poor
Because tax liens are reported to the three credit rating agencies and remain on credit reports for seven years, they can wreak havoc on taxpayers.
"Increasingly, employers, mortgage lenders, landlords, car dealerships, auto insurance companies, and credit card issuers utilize credit reports, so a tax lien has the potential to render someone unemployable, unable to obtain housing, and unable to obtain car insurance or a credit card, at least at reasonable rates, for many years into the future," Olson said.
No Proof Tax Liens Work
There are no data that show whether tax liens improve IRS revenue collection. In fact, the heavy use of tax liens could actually deflate tax collection.
The National Taxpayer Advocate said a 2009 study suggests "there is a possibility that lien filings may reduce long-term tax collection.
"Notably, over the same period that lien filings have increased by 550 percent, annual revenue collected by the IRS's Collection function on an inflation-adjusted basis has remained flat," the advocate's report states.
The IRS ombudsman said that despite the devastating impact of liens, the IRS has not undertaken studies to evaluate whether its tax lien policies do much to increase revenue or boost future tax compliance.
Recommendation on Tax Liens
The National Taxpayer Advocate called on the IRS to immediately rescind its policy of automatically filing tax liens against accounts designated as "currently not collectible" due to economic hardship, in favor of negotiating payments from delinquent taxpayers.
The ombudsman also called on the IRS to determine whether the benefit of filing tax liens outweighs the harm to taxpayers, and whether filing tax liens will jeopardize taxpayers' willingness to comply with tax laws in the future.