If you are struggling with tax debt and feel like it’s an endless journey, your situation may not be as dire as you think. The IRS Fresh Start initiative was created to make it easier and more accessible for people to repay or settle their tax debt. Taxes often seem overwhelming and over-complicated, like a […]
If you are struggling with tax debt and feel like it’s an endless journey, your situation may not be as dire as you think. The IRS Fresh Start initiative was created to make it easier and more accessible for people to repay or settle their tax debt. Taxes often seem overwhelming and over-complicated, like a test that you forgot to study for. This study guide will ensure you are properly schooled in Fresh Start’s policies. [QandA][Q]What is the Fresh Start program?[/Q] [A]The IRS created the “Fresh Start” program in 2009 after the recession. They began rolling out the changes in 2011 and updated the programs in 2012 to ease the burden of tax debt on the American people. The IRS changed rules regarding tax debt that would allow more people to be able to pay back or settle their debt instead of filing for bankruptcy.[/A][/QandA]
IRS Fresh Start BasicsFresh Start made a few distinct changes to tax laws that made a significant difference for victims of tax debt. These changes focused on tax liens, payment plans/installment agreements, and offers in compromise (OIC). The IRS defines tax liens as the “government’s legal claim to your property when you neglect or fail to pay a tax debt,” which means that the government can repossess your stuff. Payment plans known as installment agreements help you pay off your tax debt over a set period of time. Offers in compromise allow you to settle your debt for less than you actually owe. You can pay in a lump-sum or with regular monthly payments. Changes to these rules helped many taxpayers. A report released from the Treasury Inspector General for Tax Administration showed that between 2010 and 2013, the number of notices of federal tax liens was reduced from 488,378 to 195,009.
Offer in Compromise (OIC) Changes under the IRS Fresh Start InitiativeThese updates to offers in compromise were among the most impactful of Fresh Start’s changes. Basically, the new rules calculate a taxpayer’s collection potential more favorably. Whereas before your discretionary income would be multiplied by 60, it is now only multiplied by 12 or 24 depending on your proposed payment schedule. This means a huge reduction in the amount required to settle with the IRS. A good way to think about this change is that the IRS is more flexible with settling for less than what you owe. You may think you have a lot of tax debt, but is it so much that you could never pay it off? The IRS will tell you when they analyze your collection potential. Your collection potential is a measure of how likely it is that you will be able to pay back the full amount of tax debt you owe. The IRS used to look five years into your predicted future income. But now, as long as your payment period is five months or fewer, they will look into only one year of your future income. For payment plans that are six to 24 months long, the IRS will only look two years into your future income instead of five. Other great changes to the OIC program included allowing expenses to be considered for student loans and state tax installment payments when determining discretionary income. Fresh Start OICs include more favorable terms for business owners as well! Post the initiative, the IRS now excludes equity from income producing assets into the settlement calculation. This helps business owners keep the equipment and property they need to earn a living and still allows them to settle for pennies on the dollar with an OIC. [QandA][Q]Who Qualifies for the IRS Fresh Start OIC Program?[/Q] [A]There are a few main qualifications you need for the Fresh Start initiative to apply to you. You must:
- Be compliant with filing your tax returns
- Not owe again after a plan is agreed upon
- Disclose your full financial statement if you want an Offer In Compromise
Installment Agreement ChangesThe IRS changed the debt limit for Streamlined Installment agreements and the length that the agreements can be stretched out in a 2012 change to tax rules. A Streamlined Installment Agreement is an agreement to repay the total tax, penalties and interest in full over a set period of time in exchange for not having to disclose a financial statement to the IRS. You must repay the debt prior to the Collection Statute Expiration Date on the balance expiring. Previously, the IRS stated that only taxpayers owing up to $25,000 in tax debt could use a Streamlined Installment Agreement. That threshold is now up to $50,000! This means more people can use long-term payment plans to repay their debt to the IRS and still protect their financial information regarding assets, income, and expenses. In addition, the Fresh Start Initiative increases the maximum length of a Streamlined Installment agreement from five years to six! This means lower monthly minimum payments and terms that are less daunting for many Americans.
Federal Tax Lien ChangesBefore the IRS Fresh Start initiative, the IRS would file a Notice of Federal Tax Lien for anyone with $5,000 or more in tax debt. Now, the minimum debt for a Notice of Federal Tax Lien to be filed is generally $10,000. This means that even if you think you have a large amount of tax debt, you can usually avoid a lien as long as it’s below $10,000. The Fresh Start Initiative also made changes that allow more taxpayers to avoid liens altogether or to have a lien withdrawn once filed. Since the changes were introduced, the IRS will not file a Notice of Federal Tax Lien if you agree to set up a streamlined installment agreement. Before the initiative, the IRS would file a tax lien if your balance was over $25,000. Now you can owe up to $50,000 and as long as you establish a Streamlined Installment agreement with direct debit, the IRS will not file a Notice of Federal Tax Lien against you. This makes selling property much easier. Another awesome update is that the IRS will withdraw a Notice of Federal Tax Lien that is already on file if you meet these certain conditions:
- Owe less than $25,000
- Establish an installment agreement to repay the balance in full within 60 months and the installment agreement must be paid via direct debit from a checking account.
- You must not have defaulted another agreement within the last 12 months.
- If you apply for the Withdraw of Tax Lien (IRS Form 12277) after at least three payments have drafted successfully from your bank account.
Fresh Start Vocabulary Words
- IRS Fresh Start: A program created after the recession to ease the burden of tax debt on the American people. The IRS changed rules regarding tax debt that would allow more people to be able to pay back or settle their debt.
- Federal Tax Lien: The legal claim against your property that the government invokes when you do not pay your tax debt. A public document created by the IRS is a Notice of Federal Tax Lien which lets creditors know about the lien. They can also continue even if you file for bankruptcy
- Repossession: If you can’t repay your debt, the government or other creditors can take ownership of your personal possessions. Foreclosure on a home is a type of repossession.
- Offers in Compromise (OIC): An option for settling your debt. An OIC allows you to pay less than you actually owe based on your reasonable collection potential.
- Payment Plan/Installation Agreement: Payment plans allow you to pay off your tax debt in smaller segments, such as monthly payments. An installment agreement is a long-term payment plan that lasts longer than 120 days.
- Penalty Abatement: When the IRS relieves you of certain tax penalties, usually because it is your first time getting a penalty or you have evidence of reasonable cause.