IRS More Flexible With Delinquents in Recessionary Era

People are losing their jobs. Bankruptcies are at an all-time high. Rent and utility bills go unpaid. And Internal Revenue Service officials fear that, come April 15, so will a lot of federal income tax bills.

To increase the government’s chances of being paid by everyone who owes, the IRS has broadened its acceptance of payment plans that enable financially strapped taxpayers to pay their bills over time.

The recession has been especially drawn out in Southern California, and the IRS’ Southland district offices in Los Angeles and Laguna Niguel are two of the most enthusiastic backers of the plans.

The image-polishing policy has evolved over the past few years, IRS officials say.

“We want to debunk the image that people might have, that they will be arrested if they come in here and try to set something up. We want people to understand that we’re human,” said Judith Golden, spokeswoman for the IRS’ district office in Laguna Niguel, which expects to process just over 4 million individual returns this year.

“In the past, you would have a guy who had two Mercedeses and would try to set up a payment plan. And we would say, ‘This isn’t a bank. That isn’t an option.’ But now there’s a lot of people who may have assets but who have lost their job and are really struggling,” said Michael Shuler, spokesman for the Los Angeles district.

“To put it a little crudely, when the economy is really healthy, from a collection point of view, our job is to get this guy to pay up,” he said. “But now we are trying to take the realities of the economy into consideration. We just can’t assume that those who can’t pay their taxes now are chronic deadbeats.”

The IRS offices in Los Angeles and Laguna Niguel also are experimenting with giving auditors the authority to set up payment arrangements at the end of their review of returns, saving the weeks that it now takes to establish plans through the collections office.

And for the past few years, the IRS has been testing ways to pay by credit card, although that experiment is not going on in Southern California.

“We are reasonable individuals, contrary to popular belief, and if people will come in and talk to us, they will find that they have more options than they thought,” said Jesse Cota, director of the IRS’ Laguna Niguel district. “The biggest mistake that people make is that they don’t come in and talk to us.”

Yes, this is the same agency that garnishes wages, levies bank accounts and seizes assets.

But the IRS has found that repayment plans, in addition to making it look good, generally cost it less in time and money than sending out collection agents to get people to ante up.

“If the recession is so bad and a lot of people can’t pay, it’s going to overload their system,” said Richard Vermazen, a former U.S. Treasury attorney who now works for the American Tax and Law Center in Santa Ana, whose service handles many delinquent accounts.

“When you become a priority varies,” he added. “I remember in Upstate New York, if you were under $20,000, you weren’t a priority. But in Minnesota, they’re on you like a hound dog” for a lot less, Vermazen said.

Generally, when a taxpayer files a return and doesn’t pay everything Uncle Sam says is owed, the IRS sends out a bill within four to six weeks. If the check isn’t in the mail right away, follow-up bills are sent monthly for two months.

If those notices are ignored, a final notice, via certified mail, is sent, telling the recalcitrant taxpayer to pay up or contact the local IRS office to avoid garnishment of wages and a federal lien on bank accounts.

Before 1989, most delinquent taxpayers had a mountain of red tape to surmount to set up a payment plan--and had to go through the agency’s collections department to do so, Golden said.

But the user-friendly policy was instituted that year. Now IRS tax service representatives--formerly used primarily to answer inquiries from the public or to approve payment plans when very small amounts were owed--were given wider authority to set up payment plans for sums up to about $5,000.

Today, service representatives can even set up payments over the phone.

“We’ve made it easier, so there’s less paperwork,” Golden said. “If we can get people on a payment agreement and on their merry way, then we don’t have a collection case. . . . We had to find a better way to do business.”

But the service representatives can still handle only delinquent taxpayers who have responded before the 10th day after a final notice is sent out, Golden said.

All other cases are forwarded to the collection department.

Under the new recession-era policies, however, IRS officials say they will be more willing to set up payment plans, even when a case has gone to the collection stage.

The agency has become “more discretionary” about placing liens on bank accounts or garnishing wages, said Shuler, the IRS Los Angeles district spokesman.

The move to ease financially strapped taxpayers’ burdens doesn’t mean, however, that the IRS has stopped levying delinquency fines or charging interest on monthly payments.

Fines still run 0.5% of the unpaid balance per month. The interest rate is established when a payment plan is set up.

Golden said people with delinquent accounts may find it cheaper to go to a private lender or take out a home equity loan in order to pay their tax bills on time.

And whatever a taxpayer’s financial condition, IRS officials say that everyone who is required to do so should at least file a return. The penalty for failure to file is 5% per month up to a maximum of 25% of the tax owed.

“If you can show the IRS where and how they are going to get paid, they are willing to work with you,” said Gary Boudreau, a tax partner with Deloitte & Touche in Santa Ana who handles mainly business clients. “It’s not, ‘sell your assets at fire-sale prices.’ ”

But friendly as the IRS is sounding these days, there is still reason for caution. If a payment plan is set up, a taxpayer had better stay on schedule.

“As long as they are making attempts and it’s a reasonable amount, they will go for it,” said Diane Lipinski, district manager for H&R; Block’s North Orange County offices. “But the thing I advise clients is don’t miss the payments. The IRS will have no patience.”