"A tax lien has the potential to render someone unemployable, unable to obtain housing (owned or rented), and unable to obtain car insurance or a credit card, at least at reasonable rates, for many years into the future,” Olson stated. Tax liens, which stay on credit reports for seven years, also impede the ability of small businesses to obtain loans, she noted. Consumer Reports Money Adviser has written about the impact of a tax lien and other extreme IRS measures.

And, in spite of a sharp increase in the use of tax liens over the past decade, the IRS does not have data to show that the liens actually help it collect more revenue. Over the same period that lien filings rose by 550 percent, annual revenue from the IRS's Collection function remained flat on an inflation-adjusted basis, the report noted. The Taxpayer Advocate Service (TAS), the office under Olson's purview, reported in 2009 liens may actually hurt collections, Olson said.

As she has in the past, Olson recommended the IRS step up its use of other, more benign collection methods when dealing with strapped taxpayers, including offers in compromise.

The Taxpayer Advocate Service is an independent agency within the Treasury Department charged with representing taxpayers' interests in the federal tax system, including helping to solve individuals' problems with the IRS and recommending ways to fix the system to prevent those problems. Each year, the National Taxpayer Advocate must give Congress and annual report on the state of the federal taxation system from the viewpoint of taxpayers, and an objectives report on what agency officials hope to do in the coming fiscal year.—Tobie Stanger