Fresh Start for Tax Debtors

Written by Peter Tran

June 8, 2017

Aprl 15th means many thngs to many people. For tax professonals t means a moment to breathe and refocus – a respte from the chaos and crss of the frst two weeks of Aprl: Last-mnute drop offs of tax tems and the flng of extensons whle completng returns for clents who vew extensons as an nvtaton for audt (pont of fact: t s not).

For those who owe taxes they cannot afford to pay, however, Aprl 15th can be anythng but a respte. Owng a debt to the government can be hghly stressful and fnancally devastatng. Avodng the debt ssue can result n lens beng fled on one’s property, leves (the takng of) of wages or k accounts, and n extreme cases crmnal prosecuton. Those who watch televson wll eventually see a commercal toutng resoluton for “pennes on the dollar.” Unfortunately, however, f they pay very close attenton (and get out a magnfyng glass) they wll also fnd the fne-prnt dsclamer that accompanes many of these clams.

Although settlng a $100,000 for $2,500 s a tax professonal’s rare pleasure, such vctores are generally the result of the debtor beng fnancally nsolvent wth lttle hope of recovery. These vctores also occur more frequently when ms-reported ncome s corrected or unfled returns are fled than from heated negotaton.

Fresh Start ntatve: That beng sad, the RS recently made some meanngful changes that have eased the burden on many taxpayers who owe back-taxes. The RS’s Fresh Start ntatve started a few years ago. t reduced the lkelhood of havng lens fled and made t easer to establsh an nstallment agreement to pay back taxes. t also eased the requrements for makng an Offer n Compromse and reducng the offer amount that wll be accepted. n ths artcle wll dscuss these changes.

Lens Less Lkely: A federal tax len represents the US Treasury’s clam aganst a or’s property – ncludng real estate, personal property and fnancal assets. Tax lens are automatcally created when a tax s assessed – the RS sends a bll for the tax, and the tax s not pad. Although these lens are created automatcally, a formal Notces of Federal Tax Len s what notfes the publc and credtors of the taxpayer’s debt. A Notce of Federal Tax Len can negatvely mpact one’s credt ratng and ablty to obtan credt or sell property.

For the RS, however, a Notce of Federal Tax Len can have an unntended consequence: Reducng the debtor’s ablty of obtanng the funds wth whch to pay ther back-taxes! The Fresh Start ntatve removed the frequency of ths occurrng by ncreasng the dollar threshold for flng these formal notces from $5,000 to $10,000. The ntatve also made t easer for lens to be subordnated and wthdrawn for certan taxpayers who enter nto Drect Debt nstallment Agreements to pay ther debt.

nstallment Agreements Made Easer: The Fresh Start ntatve ncreased the upper lmt for taxpayers who wll qualfy for the Streamlned nstallment Agreements Program from $25,000 to $50,000. t also added a full year for qualfyng partcpants to pay ther back-taxes by ncreasng the maxmum repayment perod from 60 to 72 months. Although the lablty threshold and repayment perod have ncreased, certan requrements must be met to qualfy. These requrements nclude the flng of all past-due tax returns and future complance wth tax flngs and payments. Other polces vary based on the amount of back-tax owed. Below s a bref run-down of these repayment polces.

$10,000 or Less: Generally, ndvdual taxpayers requeng an nstallment agreement wll not be turned down f they: 1) Owe less than $10,000, 2) Have fled ther tax returns on tme and pad all taxes due for the prevous fve years, 3) Agree to pay ther n full wthn three years, and 4) The RS agrees they need addtonal tme to pay.

$25,000 or Less: Those who owe $25,000 or less n back-taxes and do not qualfy for a “guaranteed” nstallment agreement may qualfy for the Streamlned nstallment Agreement. The agreement s requested by completng Form 9465. f accepted, taxpayers wll have up to 72 months to pay ther back taxes. Although ths request can be refused by the RS, t wll generally be accepted f all tax returns have been fled and the taxpayer has not defaulted on a prevous agreement.

$25,000 to $50,000: The Fresh Start ntatve made t possble for those owng between $25,000 and $50,000 to also qualfy for a Streamlned nstallment Agreement. The agreement s requested by completng Form 9465-FS and wll gve taxpayers up to 72 months to pay ther back taxes. Although applyng s a bt more complex for those who owe over $25,000, t s much smpler than before. Specal calculatons must be made to determne whether the taxpayer can meet ther payment oblgaton for the up-to 72 month perod.

Offer n Compromse: An Offer n Compromse (OC) occurs when a taxpayer offers less than tax due to settle a tax defcency. Although a valuable for the Tax Professonal, successful OC are relatvely rare. The RS crtera for those who qualfy s so narrow that, based on raw hstorcal data, only about 20% are accepted. OCs can also take many months to craft, submt, and gude through the applcaton process. As a result, a prmary task of the tax professonal s to determne whch taxpayers wll make successful Offer n Compromse canddates.

The Fresh Start ntatve, however, may help ncrease the OC acceptance rate by makng t easer for many tax-debtors to qualty and by reducng the number of months of tax payer ncome (bascally defned as monthly funds left over after essental lvng expenses are pad) used to calculate the offer. The ntatve also allows taxpayers to nclude federally guaranteed student ln payments and the repayment of certan delnquent state and local taxes. Under certan crcumstances t wll even allow a certan amount of debt payments, such a mnmum credt card payments when determnng ablty to pay. These changes have effectvely reduced the amount of an offer the RS wll deem as acceptable.

Today have dscussed certan aspects of the RS Fresh Start ntatve dd not, however, dscuss many of the requrements and lmtatons of the repayment optons lsted above or many other that may nfluence your stuaton or repayment . As always, remember that ths (or any) artcle does NOT contute tax advce. f you have queons or need assstance, please feel free to contact our offce f you wsh to speak wth a tax professonal.

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