Taxpayer advocate to IRS: Don't lien too heavily

NEW YORK (CNNMoney.com) -- The tax man has gotten a lot more aggressive in slapping liens on taxpayers who are seriously delinquent in their payments.

In fact, the Internal Revenue Service issued 475% more liens last year than it did in 1999.

But it hasn't been doing so judiciously, which is causing unnecessary harm to some taxpayers and, ironically, to federal coffers, according to national taxpayer advocate Nina Olson.

"Taxpayers are being greatly harmed for very little benefit to the government," Olson told CNNMoney.

Olson is a government official whose job is to highlight for Congress the most serious problems facing taxpayers. Lien issuance makes her top 5 list.

In her annual report to Congress, released on Wednesday, Olson says the IRS must do more to assess whether the benefits of a tax lien outweigh its harm to the taxpayer.

The IRS imposes a lien on a person's property to ensure the government is first in line to be paid if a delinquent taxpayer sells or refinances property. The lien is issued when an agent determines a taxpayer can't pay up.

But IRS agents only take into account a person's income and expenses and not other debts and assets when sizing up his ability to pay, according to Olson. Then, the decision to issue the lien is typically not reviewed by higher-ups at the agency.

"Employees should look at all the facts and circumstances," said Olson.

That's because issuing a lien against someone who can't pay and who doesn't have any assets can create a "lose-lose" proposition for both the taxpayer and for the government, she noted in her report.

Here's why: A lien slams a taxpayer's credit score and can remain on a credit report anywhere from 10 years to 15 years or more, depending on the policy of the credit bureau.

That means it harms a person's ability to get an affordable loan. And it can hurt his chances of getting a job or an insurance policy since employers and insurers often check credit history. So potentially his costs go up while his earning potential goes down along with his potential to be a source of tax revenue for Uncle Sam in the future.

Worst case scenario: It may mean the taxpayer ends up needing to tap Uncle Sam for cash.

"If the filing of a tax lien drives up a taxpayer's costs and renders him or her unemployed or underemployed, the government may be forced to make outlays in the form of unemployment benefits, food stamps and the like," Olson wrote.

To measure the effectiveness of liens in collecting revenue, Olson's office tracked the cases of 270,000 taxpayers who first had a tax balance due in 2002 and on whom the IRS later put a tax lien.

One of the findings: Lien issuance doesn't boost revenue collection.

Last year the IRS issued 966,000 liens, up from 168,000 in 1999. During the same decade, however, the money the agency collected in delinquent cases fell by 7.4% after adjusting for inflation.

Another finding from the study: In many cases where money is recovered, it's not because of the lien.

More than 80% of the money the IRS collected was the result of of other measures - such as the withholding of a taxpayer's refunds.

The IRS contested Olson's finding. It said the study's methodology - for instance, only considering payments that had been coded as a lien payment - "limits the ability to draw meaningful conclusions" since the study ended up excluding 56% of the payments made.

In addition, liens can spur taxpayers to pay up, the agency said.

"Taxpayer actions such as making installment payments, filing an offer in compromise or paying the liability in full may be motivated" by the filing of a lien or even the threat of one, the IRS said.

And it did not agree with a recommendation that employees get managerial approval for liens in cases where the taxpayer has no current assets.

The story isn't over. Olson said she would continue to press her recommendations with the IRS. And key lawmakers are already weighing in.

"I worry that the IRS is reverting to some old habits to taxpayers' detriment," Sen. Charles Grassley, R-Iowa, said in a statement. "The IRS has to use its discretion to determine when liens are the best course to improve tax collection and when they are just a knee-jerk enforcement tactic that will do more harm than good."