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IRS Fresh Start: A Study Guide for Reducing Back Taxes to the IRS
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.
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.
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.
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.
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:
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!
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.
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!
Article last modified on August 7, 2019. Published by Debt.com, LLC