There are many ways that a taxpayer or business can accrue a tax debt, such as failing to file, or not making the correct estimated payments. Depending on your unique tax situation, you may qualify for tax debt relief under the Fresh Start Initiative implemented by the IRS. However, you must meet the following basic eligibility requirements.
Who Qualifies for the IRS Fresh Start Program?
In order to qualify for the IRS Fresh Start program, first you must:
- File all Missing Tax Returns
- Correct Your Tax Withholdings (W-4)
- Make all Required Estimated Tax Payments
- Make all Required Federal Tax Deposits
- Avoid Bankruptcy
What is the IRS Fresh Start Program?
The Internal Revenue Service (IRS) is a bureau of the Department of Treasury, created in 1862 for the purpose of tax administration. The IRS underwent many changes due to the Internal Revenue Service Restructuring and Reform Act of 1998. This Act also defined several programs that allowed taxpayers to pay back tax debt owed. However, the strict standards for those programs resulted in high rejection rates for taxpayers seeking help. That’s why in 2012, these programs were renewed and the standards were adjusted under the Fresh Start Initiative.
Most noticeably, the application process was streamlined and the IRS made it easier for responsible taxpayers to seek tax debt relief. The IRS adjusted the threshold limits, allowing more taxpayers to qualify for these programs. For example, the threshold that the IRS would generally use to place a tax lien was increased from $5,000 to $10,000 (with some exceptions).
The IRS Fresh Start program includes processes for making payment arrangements, seeking penalty relief, negotiating offers in compromise, and seeking a lien release. The IRS also makes it easier for taxpayers in debt to claim financial hardship. Student loans, as well as state and local taxes, are included as allowed expenses that the IRS takes into account in their analysis. This is especially helpful considering the Tax Cuts and Jobs Act limits the Federal tax deduction for state taxes at $10,000.
The Fresh Start program is designed to help taxpayers struggling with high tax debts. These debts can form in many different ways. One common cause of tax debt is from penalties and interest charged due to missing or late tax returns. The IRS can charge hefty fines for failing to file and pay taxes. Filing an extension only extends the time you have to file and doesn’t extend your time to pay. You may face interest and penalties for late payments.
There are also penalties for failing to pay estimated taxes or bounced checks. Estimated taxes are mandatory for both self-employed individuals and businesses that earn over certain amounts, and the taxes are not automatically withheld from these earnings. In contrast, an employee can file a W-4 to change their tax withholdings from their paycheck. Estimated taxes must be paid to the IRS in four equal installments every year or they are considered late. Freelancers and self-employed individuals owe self-employment taxes on their income. Businesses can owe payroll and excise taxes which must be made in equal estimated tax payments. Failing to properly manage these estimated taxes can also lead to penalties and interest and a large tax burden.
Interest on tax debt is determined quarterly but accumulates daily based on the date it was originally due. The failure-to-file penalty is 5% of the amount owed and can increase to 25% over time. These and other penalties and interest can account for almost 40% of a tax debt. Unfiled tax returns can also lead the IRS to file a substitute return for you. Unfortunately, these substitute returns typically do not apply all the credits for deductions and exemptions you may have been able to claim. If the IRS determines you owe, they will send you a bill and the interest owed will be added to any penalties.
A taxpayer with a large tax burden can expect the IRS to seek payment and enforce collection. If a tax bill is not paid in a timely manner, or the IRS thinks you may not be willing to pay, then a federal tax lien can be placed on your assets– such as their bank accounts, property, investments, and future returns. If a debt remains unpaid, the IRS can seize or levy that property to satisfy the debt. In addition to the loss of your assets, a federal tax lien can become public record which can impact your ability to borrow on credit. The IRS can also garnish your wages and take directly from your paycheck, as well as other future income, such as state tax returns. If you find yourself owing a large tax debt, there are many relief options available under the Fresh Start program.
The Fresh Start program offers several different options for taxpayers, depending on their unique needs. Those who can afford to pay are expected to do so, but if doing so will cause undue financial hardship then you can apply for relief. Penalty abatement is available for individual taxpayers earning under $100,000, and under $200,000 for those married and filing jointly. You must also be able to show unemployment for at least 30 consecutive days in that tax year, or prove that as a self-employed individual you experienced a 25% reduction in income.
If you cannot pay the IRS debt in a single lump sum, you may be able to apply for an installment agreement where you agree to pay over a period of time. The Fresh Start program expands who is eligible for installment agreements by increasing the tax debt threshold from $25,000 to $50,000 and allowing payments over longer periods up to 72 months (6 years). The new program also allows taxpayers to request a lien withdrawal after several successful payments.
An offer in compromise (OIC) is where a taxpayer can negotiate with the IRS to prove they cannot pay a tax debt. In some cases, the IRS may settle for less or partial IRS debt forgiveness. By increasing the debt threshold, the Fresh Start Initiative allows more taxpayers to become eligible for this OIC program. The IRS will analyze your ability to pay, your assets, the amount owed, and other mandatory living expenses in order to determine if an offer in compromise is a valid option.
How Do You Apply for the IRS Fresh Start Program?
You do not apply for the IRS Fresh Start program. Instead, you apply for one of the options that the Fresh Start program enhances, such as a penalty abatement, installment agreement, offer in compromise, or lien withdrawal. Generally, you need to meet the basic eligibility requirements and also any additional requirements for each option. You will also need to file the appropriate forms and pay any application fees. Those who earn below a certain threshold may be able to waive the application fees.
IRS Fresh Start Eligibility Requirements
File all Missing Tax Returns
The IRS will not consider any offers or agreements unless you have filed all your missing or late tax returns. They will also need time to process these returns once they have been filed, a process which can take roughly six weeks. In some cases, the IRS may have filed a substitute return in place of a missing return. Since these may not apply all the deductions and exemptions you could have claimed, you will want to file your own tax returns. If you are facing a serious tax burden, you may also want to seek professional assistance to ensure you are maximizing your deductions and that the amounts are correct.
Correct Your Tax Withholdings
If you are an employee, your tax withholdings are taken directly out of your check. You can adjust how much is taken by giving your employer a W-4 detailing what exemptions you claim. This must be correct for a period of at least six months to be eligible for tax debt relief. For taxpayers who work for an employer and also freelance or have untaxed income, you can increase the amount withheld from your paycheck to offset the taxes due from your other untaxed income. You want to ensure your withholdings are correct because it directly impacts your tax return. When filing your income taxes, withholding too much will result in a refund, but leave you with smaller paychecks each month. In contrast, withholding too little will give you a larger paycheck, but you will likely owe taxes and may even face underpayment fines and penalties.
Make all Required Estimated Tax Payments
Estimated tax payments are due in four equal payments which must be calculated ahead of time. Failing to make payments, or not paying enough, can result in fines and interest. You will also not be eligible for other tax relief options if you are not up to date on estimated payments. Freelancers, self-employed individuals, businesses and small business owners are frequently required to make estimated tax payments on income from untaxed sources such as dividends, interest, rent, business earnings, and self-employment.
Make all Required Federal Tax Deposits
Besides federal income tax withheld from paychecks for employees, a business is also required to make deposits for social security and Medicare taxes– which can include the employee and employer portions. These and other IRS tax payments must be paid and up to date in order to be eligible for the Fresh Start program options.
To qualify for the Fresh Start program, you must not currently be in bankruptcy proceedings. Bankruptcy will not always remove a tax debt and if you are currently going through a bankruptcy, the IRS will not consider any applications for tax relief.
How to Seek Penalty Relief
For some Fresh Start options, you must also meet additional eligibility requirements specific to those programs. Penalty relief, for example, requires you to prove unemployment for at least 30 consecutive days. If you are self-employed, you may have to prove a 25% reduction in income to qualify. Those who are married may face joint eligibility requirements. Income level is also an important factor.
Once you have met the basic requirements, you then choose which relief option will best meet your needs. Your option may include penalty abatement, installment agreements, an offer in compromise, or lien withdrawal. File the appropriate form (with applicable fee) and allow the IRS time to process your request. In cases where a request is denied, your application fee and any down payment may not be returned, but instead will be applied towards the tax debt.
Although the Fresh Start program streamlines the processes and simplifies the application process, it can still get confusing. There are many forms to choose from depending on your unique circumstances. An offer in compromise would be on IRS Form 656, but if you doubt the legitimacy of the tax debt you may send a Form 656-L (Doubt as to Liability). You may also need to send IRS Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals), or IRS Form 433-B (Collection Information Statement for Businesses). To ensure you are choosing the right form, you may wish to consider professional help from a tax attorney.
Do I Need a Tax Professional’s Help to Apply?
You are not required to hire a tax professional when applying for any of the options enhanced by the Fresh Start initiative. The program was created to simplify key processes for taxpayers. You can even apply online for some of these options.
However, if you want your best chance at successfully navigating these complex waters you may want to seek professional assistance. A tax expert can offer knowledge and experience, greatly increasing your chances of submitting a successful request. A tax attorney can help you navigate the IRS Fresh Start program and select the best program for you. For example, installment agreements include multiple options, such as immediate payment, short-term payments of less than 120 days, and long-term payments over 120 days. Each option carries different requirements and processing fees. You may need to set up direct debit payments to qualify for certain options.
It is important to know that certain actions you take with the IRS will impact your future ability to qualify for certain options. For example, the statute of limitations on IRS debt is generally 10 years. However, applying for certain programs may pause or extend that timeframe, which gives the IRS more time at your expense. A tax lawyer can help you determine the right forms to use and identify the best course of action.
You may also need to meet specific deadlines for certain actions, such as appeals or fee reductions. For example, Form 13844 (Application for Reduced User Fee for Installment Agreement) would need to be submitted within 10 days of an installment agreement acceptance letter in order for the IRS to consider waiving or reducing the fee. Also, the IRS payment plan Form 9465 (Installment Agreement Request) may also need to be filed with Form 433-F (Collection Information Statement). You might also need to use IRS Form 12277 (Application for the Withdrawal of Filed Form) in order to remove a federal tax lien. Having a tax attorney on your side will greatly increase your chances of success.
Be aware that the amount that the IRS says you owe may not be accurate. You may have already paid some of that amount, or the IRS could be using a substitute return. A tax professional can help ensure you are being charged the correct amount and then help you determine the best options. No matter where you are in the collections process, a tax expert can help you choose the best available course of action. This is true even if the IRS has already placed a lien on your assets, or even levied assets and sold them. If you act quickly, in some cases you can even retrieve your sold assets. You can also appeal decisions and pursue other tax relief options, such as using credit cards or taking out a loan.
In many cases, a tax lawyer can help you get a lien removed from an asset, such as a home, in order to sell it or use as loan collateral in order to pay back the IRS. If you are serious about paying back the amount owed, and follow the right processes, the IRS will generally work with you. If you have foreign income or assets as well as missing or late tax returns, you may want to hire a tax attorney who can help you settle your tax debt.
Frequently Asked Questions about the IRS Fresh Start Program
Do I Owe the IRS?
There are multiple ways to find out how much you owe the IRS. First, you may receive a tax bill from the IRS when they discover you owe them. You can also go online to the IRS website or even call the IRS to see if you owe. The IRS will not call you to demand immediate payment, so beware of phone scams where people pretending to be IRS officials will ask for personal information and payment details over the phone.
What If I Can’t Pay My Taxes?
If you can’t pay your taxes, there are options available. Depending on your situation, you can pursue any of the options available through the IRS Fresh Start Initiative. These options include penalty abatements and an offer in compromise, both of which may help reduce the tax debt and arrange for affordable payments. In some cases, the IRS can garnish your wages and seize assets to settle the tax debt. Keep in mind that you do have options, even if your situation seems dire. If you are not sure what to do next, reach out for professional assistance. In addition to the benefits of attorney-client privilege, a tax attorney will work to help you reduce your debt and arrange a payment plan that releases your assets and stops wage garnishment.
How to Pay the IRS?
The IRS offers many different payment options. You can pay online using the IRS website or their mobile app. Checks and money orders can also be used, and you can even pay using cash at some retail partner locations. Direct payments from your bank account, wire transfers, and using a credit or debit card are also common payment options. The IRS offers the Electronic Federal Tax Payment System (EFTPS) geared towards businesses. Be aware that some of these services may charge a fee to process payments.
What is the Statute of Limitations on Tax Debt?
Generally, the IRS may not pursue a tax debt after 10 years. There are exceptions to this, however. You can also extend that time when seeking certain tax relief options. The IRS may also ask you to voluntarily extend this collection period in order to obtain a beneficial installment agreement or offer in compromise.
Can My Tax Debt be Forgiven?
The IRS rarely forgives a tax debt. You may qualify for a partial reduction of a tax debt through one of the Fresh Start programs, such as the offer in compromise. Basically, you must prove that you cannot pay the IRS back before they will consider reducing your tax debt. In some cases, the IRS will determine that your debt is Currently Not Collectible and may stop collection proceedings. However, this may not stop interest and penalties from being applied to your account which increases the amount owed. You may also not receive any tax refunds and will have a harder time obtaining credit or pursuing other fiscal options. The IRS will continue analyzing your income and ability to pay until the statute of limitations has passed.
Can I Negotiate My Tax Debt with the IRS?
Yes, there are ways you can negotiate your tax debt. First, you can use several programs from the IRS Fresh Start Initiative to reduce your tax debt, such as penalty abatements or an offer in compromise. You must be able to prove that paying your tax burden in full will cause undue financial hardship. The IRS will generally work with a responsible taxpayer. You can also seek professional tax advice to increase your chances of negotiating successfully with the IRS.
Can the IRS Take All the Money in Your Bank Account?
If you have an unpaid tax debt, the IRS can place a lien on your assets– including your bank account. Your bank will freeze your funds for 21 days before releasing it to the IRS. This gives you time to take action and make arrangements with the IRS. They will also not take your primary home or vehicle you use to commute to work. If you owe a tax debt and are facing IRS collection actions, you do have options! Consider reaching out to a tax attorney for professional help.
Can the IRS Take Your 401k?
Yes, the IRS can take your retirement accounts, such as a 401k or IRA, to satisfy an unpaid tax debt. However, before it gets to this point, you will generally be notified of the debt and have time to make other arrangements. It is important to act as soon as possible to give yourself the best chances of reaching a beneficial agreement. The longer you wait, the more it will cost you.
What Type of IRS Tax Debt Settlement is Available to Me?
There are several IRS tax debt settlement options available for most taxpayers. Your specific tax situation may mean that one option is better than another. For advice on your situation, you may want to consult with a professional. In general, your options may include penalty abatement, IRS installment agreements, an offer in compromise, or lien withdrawal. These options can help reduce your tax burden by either reducing the amount owed or by allowing smaller payments to be paid over a longer period of time. Consider obtaining the services of a tax attorney to ensure your tax returns are correct and that you actually owe the amount the IRS says you owe. An attorney can also help you pursue other settlement options.
Will Bankruptcy Help Me Avoid a Levy or Seizure?
Unfortunately, bankruptcy may not release your assets from a lien or levy. In some cases, a tax debt will persist past bankruptcy. The IRS will not consider most tax debt settlement requests if you are currently undergoing bankruptcy proceedings. Also, the type of taxes owed will impact your ability to discharge the debt. There are many factors that will impact your ability to use bankruptcy in relation to a tax debt. To determine if this is a valid option, be sure to consult with a tax attorney.
IRS Fresh Start Program Highlights
The IRS Fresh Start program streamlines the processes and associated programs for taxpayers seeking tax debt relief. Tax debt can be caused by many different situations, such as missing or failing to file an income tax return, receiving untaxed money or income, or failing to pay estimated taxes or tax deposits. The IRS also charges hefty fines and interest on tax debts. If you owe the IRS money, they will send you a notice before attempting to collect your assets. Taxpayers seeking relief from tax debt can turn to the revamped Fresh Start program to ease their tax liability.
Once you determine you have a tax debt, you should ensure that the amount you owe is accurate. If the IRS has filed a substitute return for you, it may not be correct. You could then file a corrected return with the right deductions and credits. Next, determine which Fresh Start program is right for your situation. This may include penalty relief, installment agreements, or lien withdrawals. If you cannot pay the tax debt, you can seek an offer in compromise to reduce the amount owed.
To qualify for the IRS Fresh Start program, you must file all your tax returns with appropriate supporting forms. Ensure your W-4 tax withholding has been correct for the last 6 months. Next, you must make all required estimated tax payments or federal tax deposits. Also, you cannot be pursuing bankruptcy. Finally, there are additional requirements for each individual program, such as specific income limits and tax debt thresholds.
Responsible taxpayers who owe money to the IRS can choose from a variety of options that meet their needs, such as penalty abatement, installment agreements, offer in compromise, or lien withdrawals. Each program has specific eligibility requirements. The IRS will analyze your income, assets, amount owed, and other factors to determine your eligibility. Once you submit the required forms and associated processing fees, wait for the IRS to make a determination. You can also appeal decisions you think are incorrect, in many cases. You may not be able to achieve total debt forgiveness, but you can ensure your tax burden doesn’t keep increasing by agreeing to a federal tax payment plan.
Since dealing with the IRS can involve complicated tax issues and subsequent laws and regulations, it’s a good idea to seek professional help. A tax attorney can help you choose the right options and prove your case to the IRS. The legal experts at Acadia Law Group can help you rework your tax returns to ensure you have claimed every possible exemption and deduction. We can help negotiate with the IRS to stop a tax levy and help you keep your hard-earned assets. For assistance with your tax debt and to learn more about the IRS Fresh Start program, reach out to Acadia Law Group today.