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.
Q:What is the Fresh Start program?
IRS Fresh Start Basics
Fresh 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 Initiative
These 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.
Q:Who Qualifies for the IRS Fresh Start OIC Program?
- 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
Want to know if you qualify for the IRS Fresh Start Program? Talk to a certified Fresh Start tax expert today for a free evaluation
Installment Agreement Changes
The 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 Changes
Before 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.
Q:How do I use the IRS Fresh Start program?
If you want to take advantage of the Offer in Compromise program or you owe more than $50,000, the IRS requires certain documents from you to prove that you meet the qualifications for Fresh Start. This includes proof of assets, income, and expenses as well as any other financial documents the IRS requests. You can gather and send these yourself or get help from a professional if needed. The more complicated your situation is, the more you need the help of a tax resolution specialist.
Once you have worked out how to repay or settle your tax debt with the IRS, your next step is to simply abide by the terms of that agreement and make your payments on time. Be aware that missing payments or failing to meet the terms of the agreement can result in defaulting the program. It is also imperative that you file new income tax returns each year on time. If you take these steps, there will be light at the end of the tunnel. Your tax debt will be a thing of the past!
Q:How do I avoid IRS Fresh Start program scams?
In fact, the real IRS will never call you as the first point of contact. The IRS sends all important notifications through standard mail. Always be skeptical when someone emails, texts or calls you asking for money, and don’t be swayed by threats. Never reveal additional personal information about yourself! Instead, call the IRS back directly using a phone number on their website to verify the information you are being given.
Q: Do the Fresh Start rules still apply, and do I need a professional to use them?
For example, they may be able to see that you qualify for penalty abatement when you set up an installment agreement and the IRS will not volunteer that information to you. Overall, hiring a representative means that you have someone skilled at the IRS rule book who can ensure you get the best possible outcome! Remember, the IRS hires employees to protect the government’s interests, not yours!
Don’t try to negotiate with the IRS on your own. Let Debt.com connect you with a certified tax resolution specialist that can make sure you get the results you want.
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.
Article last modified on March 22, 2023. Published by Debt.com, LLC
Reviewed By
Jacob DayanAuthor
Expert contributor, Community Tax CEO & Co-Founder
