IRS Fresh Start Program 101 – A Beginner’s Guide

Maybe a tax break doesn’t seem possible when you’re behind on your taxes? Or, all the stories about misdemeanor charges against celebrities for failure to file tax returns suggest that there is no way to negotiate or settle with the IRS if you find yourself needing some form of debt forgiveness?

You’re not alone in thinking that the IRS doesn’t provide any leeway if you find that an unpaid tax balance is going to lead to substantial penalties and interest payments and an unbearable payment arrangement. While many people panic or think that the IRS will not take action on unfiled tax returns if they don’t send forms in, that is simply not a good strategy to take, because by not voluntarily submitting neglected tax returns, a taxpayer runs a very expensive risk.

In 2009, the US economy didn’t look good. In fact, economists were describing it as the worst economic crisis since the Great Depression. The IRS announced that it would offer the Fresh Start Initiative to help thousands of struggling taxpayers resolve their outstanding back taxes. That year, given that the US economy saw a record number of homeowners fall behind on their mortgage payments coupled with an alarming rate of job losses, taxpayers in various hardship situations could adjust payments for back taxes, avoid defaults, or defer collection. By 2011, the IRS implemented collection alternatives as a fresh start for businesses and individuals.

Since then, the IRS has expanded the initiatives by creating more flexible terms to their programs.

Under the initiative, the IRS offers three collection methods to help taxpayers meet their obligations without adding excessive burdens. Tax attorneys and accountants are available to review and offer advice to taxpayers on which method to consider. If you owe back taxes and have received liens, notices or letters from the IRS, do not ignore them. Contact us immediately so we can handle the matter with the seriousness that is required and to determine the best program under the Fresh Start Initiative.

Steps That You Take To Benefit from the Initiative:

Step 1 – Review Documents

First, as we review IRS documents that you have received, we work with you to determine whether you qualify. Before determining which of the three collection methods to pursue and which forms to fill out, the IRS provides some relief by not assessing the failure to pay penalty on certain wage earners and self-employed individuals. The IRS also requires that a taxpayer’s delinquent balance not exceed $50,000 and that their income must fall below specific thresholds. One of the important steps to take initially is to determine how filing for an extension may impact your collection process, because occasionally there are significant savings that result from eliminated penalties.

Step 2 – Review Circumstances

Once we determine that you are qualified in general, we review your circumstances to see whether you could resolve your tax debt through an Offer in Compromise, Installment Agreement, or by withdrawing your tax lien.

  • An Offer in Compromise allows you to settle your tax debt for less than the full amount. In order to provide a fresh start, the IRS increased the tax debt from $25,000 to $50,000 for qualifying taxpayers. They also reduced the annual income from $100,000 to $50,000. The Fresh Start Initiative also streamlined the documentation that is required from taxpayers. Using the Offer in Compromise Pre-Qualifier and the IRS Form 656 Booklet, we also make sure that you file all tax returns that you are legally required to file and begin the application process. There is an application fee associated with filing the offer. The application must include: Form 656 “Offer in Compromise;” and a completed Form 433-A (OIC) “Collection Information Statement for Wage Earners and Self-Employed Individuals” or a Form 433-B (OIC) “Collection Information Statement for Businesses.” Form 433-A and 433-B helps the IRS gather pertinent financial information about you so that they can assess your offer based on the information you provide. There are specific requirements for joint and separate tax debts and individual and business tax debts. We will gladly discuss with you how long the IRS takes to evaluate your offer, what you can do while you wait to avoid more costs, and what happens if they reject your offer. Basically, the IRS won’t accept an offer that is below a taxpayer’s reasonable collection potential, which is determined by assessing the taxpayer’s equity and net income. Under the Fresh Start Initiative, the IRS is willing to accept offers that are significantly lower than previously. The Fresh Start makes it more conceivable for taxpayers to settle their outstanding tax debt.
  • Next, you might qualify for an Installment Agreement. Under the Fresh Start Initiative, the IRS increased the dollar threshold for taxpayers to qualify for the streamlined installment agreement to increase the number of qualifying small business taxpayers. It increased from $10,000 to $25,000. A business taxpayer is required to pay it off in 24 months through a direct debit. The IRS also increased the dollar threshold for individual taxpayers from $25,000 to $50,000. An individual taxpayer is required to pay it off in 72 months, rather than the previous 60 months. In order to apply, we help you fill out Form 9465 “Installment Agreement.” If the debt is greater than $50,000, the IRS requires additional forms that serve as financial statements. They may ask for Form 433-A or Form 433-F, both Collection Information Statement forms. You also may be eligible to file through the Online Payment Agreement if your balance due is not more than $50,000. There are specific requirements if you have ever filed bankruptcy or an Offer in Compromise. If the IRS approves your request, then the IRS agrees to let you pay the tax you owe in monthly installments instead of in full.
  • Additionally, the Fresh Start Initiative increased the amount that a taxpayer can owe before the IRS files a Notice of Federal Tax Lien (NFTL). In fact, the amount was doubled from $5,000 to $10,000. This reduced the number of NFTL’s that were issued. This helped save a lot of credit ratings for taxpayers. The IRS also began to withdraw NFTL’s when taxpayers submitted requests and entered into direct debit installment agreements. They were also withdrawn for taxpayers with unpaid debts of $25,000 and who participated in direct debit installment agreements. Once an NFTL is withdrawn, it removes the mention of the NFTL from the taxpayer’s credit report or shows as ‘withdrawn.’ Taxpayers may request to withdraw a filed NFTL using Form 12277 “Application for Withdrawal.” Taxpayers who may qualify to have their lien notice withdrawn if they participate in direct debit installment agreements can make their request on Form 12277 also.

Step 3 – Determine IRS Status

If we determine after reviewing your documents that your best bet is to file “Currently Not Collectible,” then we will need to prove to the IRS that you don’t have enough money at the end of each month to pay off your debt over reasonable and necessary expenses. In this situation, the IRS will agree to leave you alone and give you time to recover. The IRS may ask you to provide financial information including your assets, expenses and income on a Form 433-A or 433-F “Collection Information Statement.” The IRS has up to 10 years from the date your taxes were assessed to collect the taxes, with certain exceptions, although they are not required to suspend interest and penalty charges while the account is placed in CNC status. We’re happy to discuss whether this is the best option for you so that we can decide whether negotiating a CNC with the IRS is in your best interest.

Given that the IRS collection process is extremely complicated, the Fresh Start Initiatives have considerably helped many taxpayers. Still, it’s really in your best interest to not shove your head in the sand or handle your situation alone. If you wait to handle any pending or back tax issues you face, it can be extremely costly to you and your credit report. Our experienced tax professionals have years of experience in negotiating with the IRS on the behalf of clients and in evaluating these initiatives and specific circumstances to lead to the best overall outcome to settle a tax debt.

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