April 15th means many things to many people.  For tax professionals it means a moment to breathe and refocus – a respite from the chaos and crisis of the first two weeks of April: Last-minute drop offs of tax items and the filing of extensions while completing returns for clients who view extensions as an invitation for audit (point of fact: It is not).

For those who owe taxes they cannot afford to pay, however, April 15th can be anything but a respite.  Owing a debt to the government can be highly stressful and financially devastating.  Avoiding the debt issue can result in liens being filed on one’s property, levies (the taking of) of wages or bank accounts, and in extreme cases criminal prosecution.  Those who watch television will eventually see a commercial touting tax debt resolution for “pennies on the dollar.” Unfortunately, however, if they pay very close attention (and get out a magnifying glass) they will also find the fine-print disclaimer that accompanies many of these claims. 

Although settling a $100,000 tax debt for $2,500 is a tax professional’s rare pleasure, such victories are generally the result of the debtor being financially insolvent with little hope of recovery.  These victories also occur more frequently when mis-reported income is corrected or unfiled returns are filed than from heated negotiation. 

Fresh Start Initiative:  That being said, the IRS recently made some meaningful changes that have eased the burden on many taxpayers who owe back-taxes.  The IRS’s Fresh Start Initiative started a few years ago.  It reduced the likelihood of having liens filed and made it easier to establish an installment agreement to pay back taxes.  It also eased the requirements for making an Offer in Compromise and reducing the offer amount that will be accepted.  In this article I will discuss these changes.

Liens Less Likely:  A federal tax lien represents the US Treasury’s claim against a tax debtor’s property – including real estate, personal property and financial assets.  Tax liens are automatically created when a tax is assessed – the IRS sends a bill for the tax, and the tax is not paid.  Although these liens are created automatically, a formal Notices of Federal Tax Lien is what notifies the public and creditors of the taxpayer’s debt.  A Notice of Federal Tax Lien can negatively impact one’s credit rating and ability to obtain credit or sell property. 

For the IRS, however, a Notice of Federal Tax Lien can have an unintended consequence: Reducing the debtor’s ability of obtaining the funds with which to pay their back-taxes!  The Fresh Start initiative removed the frequency of this occurring by increasing the dollar threshold for filing these formal notices from $5,000 to $10,000.  The initiative also made it easier for liens to be subordinated and withdrawn for certain taxpayers who enter into Direct Debit Installment Agreements to pay their debt.

Installment Agreements Made Easier: The Fresh Start Initiative increased the upper limit for taxpayers who will qualify for the Streamlined Installment Agreements Program from $25,000 to $50,000.  It also added a full year for qualifying participants to pay their back-taxes by increasing the maximum repayment period from 60 to 72 months.  Although the liability threshold and repayment period have increased, certain requirements must be met to qualify. These requirements include the filing of all past-due tax returns and future compliance with tax filings and payments.  Other policies vary based on the amount of back-tax owed.  Below is a brief run-down of these repayment policies.

Tax Debt $10,000 or Less: Generally, individual taxpayers requesting an installment agreement will not be turned down if they: 1) Owe less than $10,000, 2) Have filed their tax returns on time and paid all taxes due for the previous five years, 3) Agree to pay their tax debt in full within three years, and 4) The IRS agrees they need additional time to pay. 

Tax Debt $25,000 or Less: Those who owe $25,000 or less in back-taxes and do not qualify for a “guaranteed” installment agreement may qualify for the Streamlined Installment Agreement.  The agreement is requested by completing Form 9465.  If accepted, taxpayers will have up to 72 months to pay their back taxes.  Although this request can be refused by the IRS, it will generally be accepted if all tax returns have been filed and the taxpayer has not defaulted on a previous agreement.

Tax Debt $25,000 to $50,000: The Fresh Start Initiative made it possible for those owing between $25,000 and $50,000 to also qualify for a Streamlined Installment Agreement.  The agreement is requested by completing Form 9465-FS and will give taxpayers up to 72 months to pay their back taxes.  Although applying is a bit more complex for those who owe over $25,000, it is much simpler than before.  Special calculations must be made to determine whether the taxpayer can meet their payment obligation for the up-to 72 month period.

Offer in Compromise: An Offer in Compromise (OIC) occurs when a taxpayer offers less than total tax due to settle a tax deficiency. Although a valuable tool for the Tax Professional, successful OIC are relatively rare.  The IRS criteria for those who qualify is so narrow that, based on raw historical data, only about 20% are accepted. OICs can also take many months to craft, submit, and guide through the application process.  As a result, a primary task of the tax professional is to determine which taxpayers will make successful Offer in Compromise candidates.

The Fresh Start Initiative, however, may help increase the OIC acceptance rate by making it easier for many tax-debtors to quality and by reducing the number of months of tax payer income (basically defined as monthly funds left over after essential living expenses are paid) used to calculate the offer. The initiative also allows taxpayers to include federally guaranteed student loan payments and the repayment of certain delinquent state and local taxes.  Under certain circumstances it will even allow a certain amount of debt payments, such a minimum credit card payments when determining ability to pay.  These changes have effectively reduced the amount of an offer the IRS will deem as acceptable.

Today I have discussed certain aspects of the IRS Fresh Start Initiative   I did not, however, discuss many of the requirements and limitations of the repayment options listed above or many other factors that may influence your situation or repayment strategy.  As always, remember that this (or any) article does NOT constitute tax advice.  If you have questions or need assistance, please feel free to contact our office if you wish to speak with a tax professional.

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