Lien filings have surged over the last decade, leaving more and more taxpayers to face an IRS nightmare. IRS liens have jumped from 168,000 filed in 1999 to a whopping 1.1 million filed last year.
The Changes
According to the IRS, new changes may decrease the number of liens and lessen the negative impact on taxpayers. The changes include:
- Significantly increasing the general threshold for liens from $5,000 in unpaid taxes to $10,000.
- Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
- Withdrawing liens, in most cases, when a taxpayer enters into a Direct Debit Installment Agreement.
- Creating easier access to those payment agreements for more struggling small businesses.
- Expanding a streamlined "Offer in Compromise" program to help more taxpayers settle their tax debts.
Avoiding a Lien
But don't relax too soon. While the IRS touts the policy changes as a way to help debt-deluged taxpayers get back on their feet, taxpayer advocates say the only way to get real relief from an IRS lien is to avoid having one filed against you in the first place.
For one thing, although the IRS has eased the rules under which it will now file a lien, that doesn't mean it will relax the aggressive attempts to collect on its debts. In fact, the relaxed rules mean the IRS is likely to be less sympathetic to those who do not quickly settle their debt or enter into an agreement to do so.
The new policy will no doubt allow the IRS to concentrate on placing liens on taxpayers with larger debts as opposed to pursuing thousands of time-consuming enforcement actions against individuals who owe small amounts. The new changes give taxpayers a few more opportunities to stay away from the most devastating IRS enforcement actions.
Still, it helps to be prepared. "If you haven't filed in a while, and you are not prepared to pay back taxes in full when you file, it is generally a good idea to have a representative to help you navigate through the process," says Patrick Cox, CEO of tax advisory firm, TaxMasters (TAXS). "If you have two or three years of returns, you probably want to work with someone who has expertise in this area."
Coping with a Lien
In case you are hit with an IRS enforcement action, Cox recommends having a tax representation firm contact the IRS on your behalf to find out why the action is being sought, determine your financial capacity to reach a settlement, determine your options and then advise you on what your best options might be.
For example, Cox said many people don't know that the IRS can't take actions that prevent you from paying your mortgage. Tax professionals at firms like TaxMasters or J.K. Harris & Co. are aware of those rules and can help make sure that you enter into an agreement that allows you to pay both the IRS and your bills.
"When the IRS calls on you and you don't have a representative, they take the position that you know as much about taxes as they do," Cox says. "They assume that you know all of your options and they assume that whatever you agree to, you are doing so because you want to."
Consumers can find all the information they need to prepare for and respond to an IRS lien on the IRS website. However, the information is not easy to decipher and it may take days of study to truly understand your rights and determine all of your best options.
"If you don't know to ask for something, you are probably not going to be told that there is an option available," Cox says.
One of the most important things you can do for your finances is to set aside money for a rainy day. You never know when your car will break down or when you will need to come up with a significant co-pay for a medical procedure. When you don’t have a rainy day fund, these unexpected expenses can be financially debilitating and emotionally stressful. Here are some tips to help you get moving on your rainy day fund:
Start Now
The best time to start is now. “Tomorrow” can stretch into “next week”, “next month”, “next year”, “when I have the money” and “when we can afford it” until it never really gets done. The key is to do it now. Most banks and credit unions will allow you to open a savings account with very little — usually no more than $25. Open your account now, and start saving now.
It’s OK to Start Small
As already mentioned, you can open most accounts with $25. It’s alright if you have to start small, only putting in a few dollars a month. If you use cash a lot, put your change (or even dollar bills) in a jar at the end of each day. Then, once a month, add it all up and take it to the bank.
The most important thing is that you are starting a habit of saving money. As you cut other expenses from your budget, and as you look for more sources of income, you can begin increasing the amount of money you put into your rainy day fund. But first you have to be in the habit of “paying yourself first.”
Automate Your Savings
A lot has been written about the advantages of automating your money — and for good reason. You can automate your savings so that your money goes right into your rainy day fund. You can have the money taken from your paycheck and deposited directly into your savings account, or you can set up recurring transfers that move money from your checking account into your savings account once a month.
In either case, the temptation to use the money for something else is removed; you don’t ever really have access to it in your checking account. And your savings account grows at a steady rate.
Look for High Yield Accounts
You won’t ever get really good rates on cash products. That is no excuse not to get what you can, though. High yield savings accounts offer better rates than more traditional accounts. This can help you increase the interest you earn, maximizing your money as much as possible.
You can also look for incentives, such as cash bonuses for signing up for certain accounts, and other perks. This will help you increase the value of your account without too much trouble.
Bottom Line
A rainy day fund is essential if you want to achieve financial freedom. It helps you cover unexpected expenses, and can aid you in the event that you lose some of your income. Don’t delay starting a rainy day fund, even if you don’t have a lot to put in it right now. The important thing is to get started, and develop a habit of preparing for the future.
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