Life is full of unexpected moments and changes that can have a dramatic effect on your life. Some may inhibit your ability to pay the money you owe the Internal Revenue Service (IRS). For filers who truly believe they do not owe the taxes assessed to them, they can turn to the Taxpayer Advocate Service or the Office of Appeals division within the IRS. There are others, though, who simply cannot afford to pay their back taxes. Owing back taxes to the IRS leads to interest, penalties and eventually liens and levies upon state tax refunds, wages and property.
For a long time, many tax experts and consumer advocates accused the IRS of failing to help those actively trying to pay off their taxes. In response, the IRS finally announced a new fresh start initiative known as the IRS Fresh Start Program. The program was introduced in 2011, partly in an attempt to aid those hit hardest by the recession. It was organized to allow taxpayers with substantial back taxes to consolidate their tax bills and pay them off in a convenient and orderly manner.
According to research, the program is in fact helping. A 2014 report from the Treasury Inspector General for the Tax Administration revealed the impact of the fresh start initiative on thousands of taxpayers. For example, from 2010 to 2013, the number of Notices of Federal Tax Lien filed on taxpayers with assessed liabilities below $10,000 decreased from 488,378 to 195,009. That is a major 60% drop. Others were taking advantage of streamlined payment options to get ahead of their tax debt. In 2017, the IRS approved a substantial 798,403 installment agreements – making it the most widely used tax relief program under the IRS Fresh Start Program.
Today the IRS Fresh Start Program is still in effect and here to help those who need it most.
What is the IRS Fresh Start Program?
As noted above, the IRS Fresh Start Program was instituted in 2011 with the principal intention of helping taxpayers pay back taxes and avoid tax liens. After many years of struggling to help those working to pay off their taxes, the fresh start initiative offered a compilation of alternative payment options. Admittedly, the options were not necessarily new ideas, but they did indicate an evolved manner of thinking by the IRS regarding how they assessed and processed payment agreements and other alternatives.
In its most basic terms, the program addresses the ways in which the IRS:
- Treats tax liens
- Handles installment payments
- Evaluates and manages offers in compromise
More simply, a majority of the provisions outlined in the program are designed to ease the process of repaying back taxes and applying for tax relief programs.
How does the IRS Fresh Start Program work?
The IRS Fresh Start Program is not a singular form and enrollment program. Instead, it is more helpful to think of the program as a tax relief toolbox. Within that toolbox, you have a set of measures designed to help individuals and small businesses rectify their tax issues.
The four principal provisions available in the toolbox are:
- Tax lien avoidance
- Installment agreements
- Penalty relief
- Offers in compromise
How does the IRS Fresh Start Program affect tax liens?
What is a federal tax lien?
A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. It is their legal right to keep an your personal property until you eliminate unpaid back taxes. Federal tax liens apply to unpaid taxes of any kind, including income, self-employment, gift or estate taxes.
Tax liens differ from tax levies. A lien indicates the government’s right to seize the property. Conversely, a tax levy permits the actual seizure of it. When you are issued a tax lien, the IRS also notifies states and other creditors that it is first in line to receive any back taxes payments. Notably, federal tax liens threaten to considerably diminish your credit score, and, in most cases, those with a tax lien must pay taxes in full to receive financing of any kind.
The IRS has the ability to file a Notice of Tax Lien in your county of residence after the following three steps:
- Calculation of the amount owed
- Delivery of a Notice and Demand for Payment
- Neglect or refusal by the taxpayer to pay the tax debt in time
If you owe more than $10,000 and cannot pay all the taxes owed within six years, the IRS generally files a tax lien. Additionally, if you owe more than $50,000, the IRS almost certainly files a tax lien, regardless of whether you are in an agreement to pay.
How does the IRS Fresh Start Program help?
Prior to the start of the IRS Fresh Start Program, a tax lien was a potential threat even if you owed less than $10,000 in back taxes and penalties. Now, under the guidance of the program, tax liens are not filed unless the back taxes and penalties surpass $10,000. Granted there are certain exceptions to this rule.
By increasing the minimum amount before a tax lien is filed, it helps taxpayers avoid adverse effects like attachment of the lien to all of their assets until the debt is paid.
If a lien is filed, the IRS Fresh Start Program may help get the lien removed. It does not mean that the debt is wiped out, but it does prevent the negative effects of having a lien. Typically, you can request the IRS to withdraw a notice of tax lien if you:
- Pay the debt in full and remain current with all estimated tax payments and filings, or
- Pay for the debt through a Direct Debit installment agreement.
A direct debit installment agreement (DDIA) is a payment plan with the IRS where the taxpayer agrees to automatic monthly payment withdrawals from their checking account. DDIAs lower user fees and decrease the likelihood the agreement will default. In order to obtain a DDIA, the you must provide a checking account number, bank routing number, and written authorization to initiate the automated payments.
How does the IRS Fresh Start Program affect installment agreements?
The IRS Fresh Start Program also increases access to streamlined installment agreements. By setting up an installment agreement with the IRS, it does help avoid some tax penalties.
Ultimately, there are five different types of installment agreements:
- Guaranteed – Tax debts of less than $10,000 and repaid in three years or less.
- Streamlined – Tax debts of less than $50,000 and repaid in six years or less.
- Partial Pay – Similar to an offer in compromise. Taxpayers make monthly payments until the collection time expires.
- In Business – Tax debts of less than $25,000 and paid in 24 months or less.
- Routine – Larger amounts and longer repayment periods.
For example, if a taxpayer owes $50,000 or less, they are able to pay their debt through monthly direct debit payments distributed across six years (72 months).
To request an installment agreement plan, submit Form 9465 “Installment Agreement Request” or register online.
How does the IRS Fresh Start Program affect offers in compromise?
On occasion, the IRS allows you to settle your tax debt for less than the full amount originally assessed. This agreement is known as an offer in compromise (OIC). An OIC is an appealing option for people with large tax debts and are struggling to come up with the assets and income to pay them off.
Under the IRS Fresh Start Program, the IRS now extends more flexibility in deciding which offers in compromise to accept. More simply, the program effectively expanded and streamlined the OIC provisions. The increased flexibility and consideration of other financial burdens opened the OIC program up to a larger group of taxpayers. For example, the IRS now accounts for other financial responsibilities, such as student loans, state taxes and local taxes when calculating living expenses and future collection potential. In 2017 alone, the IRS approved 25,000 offers with a total value of $256 million.
There are three types of OICs:
- Doubt as to Collectability – The most common type. These are enacted if you owe back taxes and cannot pay them even if you sold your assets and/or paid in installments prior to the end of the collection time period (generally 10 years from the time of the tax assessment).
- Doubt as to Liability – The IRS allows you to dispute your tax liability. There must be a legitimate disagreement either in facts, law or argument that disputes your tax debt. You must submit documentation supporting your position. Often, filing this OIC results in a “mini audit” by the IRS.
- Effective Tax Administration – If you can pay the tax debt and do not dispute the amount you owe, but have exceptional circumstances, the IRS is able to settle the bill. This may happen if collection could generate significant economic hardship. One example is a long-term illness that requires you to slowly deplete your assets to pay future medical bills.
The IRS does not allow an offer in compromise if they have reason to believe you can pay the amount in full, either as a lump sum or through an installment agreement. Eligibility for the offer in compromise is determined by your pay, income, assets and expenses.
Note that OICs typically come with a fee and down payment to the IRS. Furthermore, it is critical to understand that OICs, even under the IRS Fresh Start Program, are incredibly rare.
What are the qualifications of this Fresh Start Initiative?
There is no detailed list of qualifications for the IRS Fresh Start Program. Rather, eligibility hinges on the tax relief option you choose to pursue. However, there are general requirements most tax relief applicants must satisfy.
Some qualifications of this fresh start initiative are that you must:
- Prove you do not have the money or assets to pay your tax debt.
- File all tax returns you are legally required to file, even if you cannot pay them.
- Make all required estimated tax payments for the current year. *This only applies to self-employed workers and small business owners.
- Make all required federal tax deposits, if you own a business with employees.
- Not be involved in an ongoing bankruptcy proceeding.
Particular tax relief programs do have additional requirements. For instance, to apply for a streamlined installment agreement, you must owe $50,000 or less. On the other hand, if you are applying for an OIC, you must provide detailed financial information by completing specified IRS forms (see above).
How do I apply for this Fresh Start Initiative?
Each tool in your IRS Fresh Start toolbox comes with a different application route. Some programs necessitate a few minutes in front of your computer while others may require up to two years to receive approval.
Payment plans are generally done either online or through Form 9465.
Installment plan applications vary depending on whether you are an employee or business owner and how much debt is owed.
How can I best take advantage of the IRS Fresh Start Program?
While the IRS Fresh Start Program provisions encourage direct negotiation with the IRS, tackling the issue on your own may inhibit your ability to take full advantage of the program.
Typically, taxpayers receive the best results by consulting with a tax professional. They understand the ins and outs of the program and have the sound insight and background to assess your situation and elect the most optimal solution. Tax professionals actively analyze your unique situation and devise a plan that works best for you. More than that, they are there to aggressively negotiate on your behalf and possibly settle your debt for far less than what you originally owed.
Give us a call. Let us fight for you.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.