In 2011, the IRS created the Fresh Start Program to help taxpayers manage their unpaid tax debt. This program offered a simple payment plan for taxpayers whose liabilities were under $25,000. Due to its success, the program was expanded to offer additional options to taxpayers with larger liabilities. With the expansion of IRS enforcement under President Biden’s Build Back Better Act, it is important for taxpayers to understand their options for managing outstanding tax debt.
Streamlined Installment Agreement
For taxpayers with liabilities of less than $50,000, a Streamlined Installment Agreement may be the best option.1 This agreement does not require an analysis of taxpayer’s finances, but it does require the balance to be paid off within 72 months. A tax liability continues to accrue interest and penalties during this time, so ensuring that the payment will also cover the increase is crucial.
During the term of the agreement, a taxpayer must remain compliant by filing tax returns on time and by paying any new liability before the due date. If these guidelines are not followed, the agreement will be revoked.
Income-Based Installment Agreement
Income-Based Installment agreements are based on taxpayer’s excess income.2 Unlike the Streamlined Installment Agreement, there is no minimum or maximum amount of debt. This agreement is often the best choice when a taxpayer who would otherwise qualify for a Streamlined Installment Agreement is unable to make the necessary payments due to limited income.
To qualify for an Income-Based Installment agreement, taxpayers must submit detailed financial documentation. This typically includes copies of all bank statements, paystubs or other proof of income, a breakdown of all assets, and detailed information regarding monthly expenses. Upon receipt, the IRS conducts a Financial Analysis based on the National Standards, which is a guideline of how much they believe each taxpayer should spend on basic living expenses and necessities. If the taxpayer disagrees with the amounts allowed by the IRS national standards, they can protest and submit proof to allow those expenses.
If a financial analysis shows that the taxpayer’s income is insufficient to meet their basic needs and satisfy their past-due taxes, Currently Non-Collectible Status (CNC) may be an option.3 The IRS will temporarily halt attempts to collect the debt, giving the taxpayer a reprieve. This can help during a period of financial hardship. The IRS will periodically review the account to determine if it’s status should be changed.
Offers in Compromise
An Offer in Compromise (OIC) is the holy grail of tax resolution as it allows you to settle your tax debt for less than the full amount you owe.4 This is a legitimate option for tax-payers who can’t pay their full tax liability, or if doing so would create a financial hardship. To qualify for this option, you must have all your tax returns filed and make any required estimated payments. You also can’t be in an open bankruptcy proceeding. When submitting your application, you must submit an initial payment of 20% of the total offer amount with your application. If your offer is accepted, any remaining balance due on the offer is paid in five or fewer payments. There are many companies who advertise OIC and make promises that they can help you “settle with the IRS for pennies on the dollar.” Sometimes, a taxpayer is able to settle for pennies on the dollar, but those situations are not common and taxpayers should not take those companies too seriously.
There are four types of Offer In Compromise: Doubt as to Liability, Special Circumstances, Effective Tax Administration, and Doubt as to Collectability.
Doubt as to Liability OIC
Doubt as to Liability exists where there is genuine dispute as to the existence or amount of the correct tax liability under the law.5 In other words, this isn’t an issue of the amount or inability to pay, but rather a claim that the tax, or a certain portion of it, isn’t owed at all. Because Doubt as to Liability isn’t a question of finances, you don’t need to provide your financial information to qualify for the offer. Doubt as to Liability can apply in several circumstances, some of which may include: the tax was incorrectly assessed; the tax was assessed to the wrong taxpayer; the tax was discharged in bankruptcy; or the statute of limitations ran out of collection.
Special Circumstance OIC
Special Circumstance OIC exists where there are special circumstances that prevent the taxpayer from being able to pay the debt. The IRS gives special consideration to people with physical or psychological conditions. The IRS has also accepted Special Circumstances OIC to people with bleak financial prospects due to advanced age, over 60 in particular. These special circumstances may also document future changes that aren’t reflected in the OIC paperwork. For example, if a taxpayer earned a large income from a previous job, but their new job has a set salary with a much lower income, we would list this as a special circumstance, even if the taxpayer didn’t have the required three month history needed with this new income.
Effective Tax Administration OIC
Effective Tax Administration (ETA) OIC exists where the taxpayer doesn’t dispute the amount of tax owed, and even has the money to pay, but has an extraordinary reason for not paying. In essence, the taxpayer has to convince the IRS that accepting the offer will be more beneficial than collecting the tax. Most of the time, potential ETA offers are reviewed for economic hardship, or for public policy or equity grounds. Economic hardship comes into play when taxpayers have the ability to pay the tax but doing so would place them in severe economic hardship. Public policy or equity grounds comes into play when “collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner.” ETA OIC’s are very difficult to get accepted because in these situations the taxpayer’s finances show that the taxpayer can fully pay the tax liability.
Doubt as to Collectability OIC
Finally, the most common type of OIC is Doubt as to Collectability. This type of OIC exists when the IRS could not reasonably collect the full amount owed prior to the statute of limitations running out. The IRS has 10 years from the date that the tax is assessed to collect any outstanding balance.6 There are a lot of pitfalls here for the unwary, such as certain things that can toll or pause the statute of limitations.
In a Doubt as to Collectability OIC, the IRS does the same analysis as in an income based or traditional Installment Agreement. If the amount determined in this analysis would not pay the entire balance, then the IRS will want the total amount they could receive from the taxpayer within a 12-month period, along with the value of a taxpayer’s assets. There are some exceptions and changes to this amount but that is the general period. This means that if the taxpayer could only pay $200 a month and would not pay off the balance within the 10 years, the IRS would want $2,400 to settle the entire balance, assuming there was no equity in assets found by the IRS. With OICs, this is regardless of how much the taxpayer actually owes.
Let Gordon Delic & Associates Help With Your IRS Fresh Start Program
This is a vast over-simplification of the entire process. OIC’s are very tricky for taxpayers to qualify for due to the numerous ways they can be rejected. The attorneys at Gordon, Delic & Associates have years of experience in dealing with these types of matters. Many taxpayers may not qualify for an OIC at the moment of their initial analysis with our firm, but in several cases, we have the ability to make changes to a financial situation so that we’re able to get a client to qualify. A strange example of a financial change is the purchase of a new vehicle. Sometimes this is all it takes to get a client to qualify for an OIC. Of course, some taxpayers do not end up qualifying either because the statute of limitations doesn’t expire anytime soon, or they have enough disposable income/assets to pay the entire tax amount to the IRS.
The IRS Fresh Start program can be a great tool for taxpayers when dealing with their outstanding tax liability. However, even with these tools, taking on the IRS on your own is not advised. The IRS is not a traditional creditor as it can simply wipe out your entire bank account if they feel like they are not getting the taxpayer to resolve the outstanding liability. Having your account levied can lead to increased monthly payments or even financial ruin. Taxpayers can avoid levies by filing timely appeals. Hiring an attorney sooner rather than later can save you a lot of money and headache down the line. While this article is an over-simplification of the program, we hope that it gives taxpayers at least some insight and reassurance that there are ways to manage outstanding tax debt. Our experienced tax attorneys at Gordon, Delic & Associates can guide you through the process and help you qualify for the IRS Fresh Start Program. Contact us or give us a call at (208) 900-9509 to get started.