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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • What is the IRS Fresh Start Program?

    download (4)The IRS Fresh Start program was created a few years ago.  It’s claim at the time was that “struggling” taxpayers needed some help so it changed some of the ways it did business with taxpayers.  The changes were done in three areas.  IRS Liens, IRS Installment Agreements and IRS Offers in Compromise.

    It is debatable whether or not these changes have actually made the process of dealing with the IRS much easier, but if you owe the IRS money or have an IRS Lien, you should be aware of them.

    IRS Lien and the Fresh Start Program

    The IRS increased the threshold for filing a tax lien notice from $5000.00 to $10,000.00.

    This wasn’t a large jump in amount.  In my opinion, it should have been at least a $25,000.00 limit.  I think that the IRS debated this issue as it did change it’s policy regarding the withdrawal of liens and used $50,000.00 as the thresh-hold amount.

    Withdrawal of Notice of Tax Lien

    Individuals

    As mentioned, the IRS also changed it’s policy toward the withdrawal of a notice of lien when it added the ability for individuals, businesses with income tax debt, or entities that have gone out of business to request the withdrawal of a lien notice under circumstances.

    The requirements for individuals to get the lien notice withdrawn are:

    1.  The assessed balance must be $25000.00 or less;

    2.  There must be full compliance, meaning un-filed returns;

    3.  3 consecutive direct debit payments have to have been made and all the payments must be made by direct debit.

    4.  You can’t have had a previously lien withdrawal for the same tax (unless lien was improperly filed);

    5.  You can’t have defaulted on your current or any previous direct installment agreement.

    6.  And the debt must be paid in full within 60 months or before the CSED Expires, whichever time is shorter.

    Small Business

    Small Businesses can qualify in much the same way, but only have 24 months to pay.

    IRS Installment Agreement and the Fresh Start Program

    If the assessed debt is $50,000 or less, the IRS now allows you to set an installment agreement without providing full financial information.  The debt is spread out of 6 years (used to be 5) or the length of time left in the CSED.  (Collection Statute Expiration Date)

    In theory, this is a big deal.  People with higher incomes that are going to have large installment payments if the financial information is provided, can now avoid the large payments by paying the assessed balance down to the $50,000 threshold and setting one of these up.  They are relatively easy to set up and I have posted elsewhere instructions about how to do it.

    The IRS’ generally won’t record an IRS notice of lien if one of these types of arrangements are set if it hasn’t filed one already.

    If the assessed balance is less than $25,000.00 no financial information is necessary to set the payment plan up, and as mentioned above, if you are able to meet those lien notice withdrawal criteria that is an added bonus.

    If a business is operating and it owes payroll taxes, the business may be able to take advantage of the “fresh start” program in relation to installment agreement if:

    1.  The debt is $25,000 or less at the time of the agreement

    2.  The payment plan is 24 months or less

    3.  The payment is made by direct debit if the amount is between $10,000 and $25,000

    4.  The taxpayer/business must be in compliance in all filing and payment requirements

    Two benefits to this are:

    1.  No financial statement is required.  This is great because it can be a real burden on a small business to put this together.

    2.  No trust fund penalty is assessed against the owner for the trust fund portion of the payroll tax.  At least it isn’t supposed to be.

    IRS Offer in Compromise and the Fresh Start Program

    The OIC program allows qualified taxpayers to negotiate a settlement for an amount that is less than the tax owed. An OIC agreement won’t be accepted by the IRS if it believes that the outstanding liability can be paid in full in a lump sum or via a payment arrangement. The IRS reviews the taxpayers’ income, potential income, past income, expenses, assets, past assets and liabilities very closely to make a determination about the ability to pay.

    Most people fail the above part of the test because they rely on the IRS’ pre-qualifier, or some bad advice and don’t fully understand as a result that the IRS won’t agree to settle if  it believes that the debt can be paid in full before the CSED ends.

    But the IRS did make a big change for people who can’t pay the tax debt in full before the CSED ends, when it altered the way it multiplied excess income under the Fresh Start program.

    Previously the IRS would multiply excess income when it was calculating how much you could afford to pay by 60 and 48.  60 if the offer amount was to paid over time, and 48 if the offer was a cash offer.

    Under the Fresh Start program, these multipliers are 24 and 12.

    Now a person with no assets and $1000.00 in excess income will pay $12000 instead of $48,000 toward the debt and $24,000 instead of $60,000 if the settlement is going to be paid over time.

    This is probably the most important overall change made to tax collection by the Fresh Start program but specifically in the offer compromise area.  It roughly doubled the numbers of offers that are being accepted from about 20% to about 40%.

    The offer in compromise program was affected in other ways as well.  The second best thing it did was to change the allowable expenses category to include more things like:

    • 200.00 per month for car allowance on older cars
    • Student loan payments
    • Some credit card payments
    • A portion of payments made to state and local tax authorities

    IRS Penalty Abatement and the Fresh Start Program

    If an offer is accepted it settles the debt and the penalty entirely, so in that sense I suppose you could argue that the penalty abatement under the fresh start program exists… but in reality this isn’t a “fresh start” program for IRS penalties.  Don’t let the salespeople fool you.

    When looking for penalty relief, you have to go through the same process that has already been in place for a long time.