IRS Fresh Start Initiative Changes to Tax Programs
Launched in 2011, the Fresh Start Initiative (FSI) is designed to give delinquent taxpayers a “fresh start” on their tax debt. The program contains different elements that make it easier to get in compliance with the IRS and resolve tax debt. In recent years, the IRS has made this program even more enticing.
This program is an extension of the IRS Restructuring and Reform Act of 1998. Below are the elements that the program contains and following are explanations in great detail.
- New Rules for Tax Liens
- Loosened the rules to Get Tax Liens Withdrawn
- Changed the qualifications for certain Installment Agreements to ease the process (Monthly Payment Plans)
- Easier to Set up Installment Agreements for Business Taxes
- Eased the Rules to Obtain Offers in Compromise (Settling Tax Debt for Less Than You Owe)
- Changes to Currently Not Collectible Status
- Expanded Penalty Relief (Now expired)
Higher Thresholds for Tax Liens
Before the Fresh Start Initiative, the IRS issued tax liens for all kinds of debt levels. Under the new rules, the IRS does not issue tax liens if the tax debt is less than $10,000. Note that there are rare exceptions to this rule.
A tax lien is a legal claim to your assets, and it appears on your credit report. A tax lien is similar to how if you owe money on a car loan, your lender has a lien on your car. If you sell the car, the lender is entitled to the proceeds of the sale. Similarly, if the IRS issues a tax lien, the IRS is entitled to any money you get if you sell your assets. When an IRS tax lien is on your credit report, lenders usually will not give you loans.
Tax Liens Withdrawn
Under the Fresh Start Initiative, the IRS also made it easier to get tax liens withdrawn. When the IRS removes a tax lien, that is called a tax lien withdrawal.
You can get a tax lien removed by paying off all your tax debt. Alternatively, if you set up an installment agreement (monthly payment plan), you can get the tax lien withdrawn after you make three consecutive payments. However, you must owe less than $25,000 in tax debt and agree to a direct debit payment method.
Unfortunately, the IRS doesn’t always remember to automatically withdrawal liens. You can request to have your lien removed using Form 12277 (Application for Withdrawal).
Installment Agreement Changes
An installment agreement is where you make monthly payments on your tax debt. With updates to the Fresh Start Initiative, the IRS let taxpayers who owed up to $50,000 set up streamlined installment agreements (more now, read below). A streamlined installment agreement offers a “streamlined” application process—you don’t have to provide a lot of financial details. As long as you meet a few minimum criteria, the IRS approves your installment plan.
In 2016, the IRS expanded the provisions of the Fresh Start Program and made it even easier for taxpayers to get streamlined installment agreements. The IRS rolled out the new rules on a trial basis, and in September 2018, the agency is going to make a final decision on whether or not to keep the new rules.
Under the new rules, you can qualify for a streamlined agreement if you owe up to $100,000. If you owe between $50,001 and $100,000, you can obtain up to 84 months to pay off your debt. That is an extra year. If you owe more than $25,000 but less than $50,000, you don’t have to set up a direct debit—you can just mail a check or pay manually every month. You can see the overview of IRS the changes here.
Installment Agreement Changes for Businesses
Generally, the IRS is a lot stricter about business tax than an individual tax. If your business owes up to $25,000, you can qualify for a streamlined installment agreement. Before the Fresh Start Program, the threshold for business tax debt was only $10,000.
If your business has employees, you may qualify for In-Business Trust Fund Express Installment Agreement for back payroll taxes. To qualify, you must be in business, have employees, and be able to pay off all your debt within 24 months. This payment plan is great for businesses that got behind in the first year or two of operations but now have enough revenue to cover payments on their tax debt.
As of 2018, the IRS is also testing expanded criteria for business tax debt repayment. If your business is an out-of-business sole proprietorship, you can qualify for a streamlined installment agreement over 72 months if you owe up to $50,000. If your out-of-business sole proprietorship owes between $50,001 and $100,000, you can qualify for a streamlined installment agreement over an 84-month period. The IRS will decide whether or not to make these rules permanent in September 2018.
Changes to Offers in Compromise (OIC)
An offer in compromise is when the IRS lets you settle your tax debt for less than you owe. In other words, you make an “offer” of how much you can pay, and the IRS “compromises” by letting you pay less than you owe.
As a general rule of thumb, the IRS only accepts offers in compromise if your offer represents the most amount of money the IRS could get if it used other collection activities. For example, if you owe $15,000 and are living on a fixed income with just enough to cover necessary expenses and you offer $5,000, the IRS may accept that amount if that is all you have. However, if you have $20,000 in your savings account and make more money than is “required” to pay your monthly living expenses, the IRS usually won’t accept that low of an offer. Instead, the agency may just require you to pay through a payment plan.
Applying and Qualifying for an Offer in Compromise
However, thanks to the Fresh Start Initiative, it is now easier than ever to get an offer in compromise. You can apply for an offer in compromise on up to $100,000 in tax debt, and you can choose between a lump sum or a short-term periodic offer in compromise. Additionally, the FSI radically changed for the better how the IRS calculates your future income in determining whether to accept your OIC. Before the FSI, the IRS considered four years of income with a Lump Sum OIC. However, now the IRS only considers one year of income. Finally, with the Short-Term Periodic OIC, the IRS only considers two years of income when formerly it was five years.
As of March 2017, the IRS will immediately reject your offer in compromise if you have any outstanding tax returns, but it will keep the down payment and apply that to your tax debt. Additionally, to qualify, you must not be in bankruptcy or be behind on any of your current tax payments.
To get a sense of whether or not you may qualify, you should work with a tax resolution specialist as the IRS’s OIC online qualifier tool is not always accurate.
Changes to Currently Not Collectible Status
Currently not collectible is when you prove to the IRS that you can’t pay your tax debt, and the IRS stops all collection activity on your account. A currently not collectible or CNC designation is usually only temporary. The IRS usually reviews your tax returns every 2 years to see if anything has changed.
The Fresh Start Initiative makes it easier to apply for currently not collectible status. In particular, if you owe less than $10,000, you may not have to provide as many financial details or documents to the IRS. Some common scenarios are listed below for people that generally qualify for currently not collectible status:
- You earn less than $84,000, and all your income goes to IRS-approved living expenses.
- All your income is from Social Security, welfare, or unemployment benefits.
- Your tax debt is almost ready to expire.
- You are unemployed and have no income.
To apply for currently not collectible status, see our section on the qualifying for Currently Not Collectible with the IRS.
Penalty Relief Under the Fresh Start Initiative
The Fresh Start Initiative started by offering special penalty relief to people who were earning less money or who had been unemployed for a certain amount of time.
In 2012, the IRS provided a six-month grace period on failure to file tax penalties for certain wage earners and self-employed taxpayers for the 2011 tax year. Moreover, it provided unemployed taxpayers until the tax extension filing deadline to pay taxes and avoid the failure to pay penalty. These provisions have expired.
However, you may still qualify for the first-time penalty abatement, which was established before the FSI. For example, when you don’t file a return or if you pay late, the IRS adds penalties to your account. If this is your first time facing penalties, you can have them both erased through the first time penalty abatement waiver. To qualify, you must not have tax penalties for the previous three years among other requirements. Even if you don’t qualify for first-time penalty abatement, you may also consider removing penalties if you have “reasonable cause” for not meeting your tax obligations.
You may want to get help from a tax professional when applying for penalty abatement.
How to Apply for the Fresh Start Program
The Fresh Start Program is not actually a program. Rather, it’s a collection of laws that make it easier to get your tax debt resolved. As explained above, there are a variety of ways to apply for a fresh start. The application process depends on whether you qualify for an installment agreement, a business installment agreement, an offer in compromise, or currently not collectible status.
With all of these programs, you usually have to meet the following criteria:
- Up to date on all filing requirements.
- Current with estimated quarterly tax payments if self-employed.
- Made all federal tax deposits (payroll tax, sales tax, etc.) if you are a small business owner.
- Not in bankruptcy.
Benefits of Working With a Tax Professional for the Fresh Start Program
A tax professional can help you identify which tax resolution options will work best for your tax and financial situation. Then, they can help you apply. Remember, a tax professional is advising you with your best interest at heart, and they work accordingly. In contrast, if you’re working directly with an IRS agent, their main concern is to ensure the IRS gets paid.