If you owe back taxes, you may be able to qualify for the Fresh Start Program provided by the IRS. This program can help relieve a lot of stress and get you back on track.
In this article, we’re taking a closer look at one of the most common questions we hear from people – what is the fresh start program with the IRS?
What is the Fresh Start Program with the IRS?
An estimated 14 million Americans owed the IRS back taxes in 2018, illustrating just how common it is to struggle with tax debt. Anything from simple clerical errors, late filing dues, or common tax misconceptions can lead to underreporting and unexpected tax bills. Sometimes, a drastic life-altering event gets in the way, and tax issues take a backseat for a few weeks, months, or even years.
But one way or another, the IRS eventually wants its money. And it has tools at its disposal to encourage taxpayers to address their liabilities. However, many families struggle with day-to-day budgeting as is, and having another hefty bill added to the pile can lead to undue and unmanageable financial hardship.
While the IRS has had options of recourse for people with financial troubles, these have historically been difficult to pursue, and needlessly complicated. The 2011 Fresh Start Program was created to try and simplify these processes and grant taxpayers greater access to a variety of existing tools for paying back taxes, eliminating liens, and pursuing reasonable alternatives in cases of overwhelming debt.
Fresh Start Program Basics
The IRS’s Fresh Start Program is not a program a taxpayer can enroll in. Rather, it is a program the IRS itself instituted to revisit and revise certain laws and implement changes in the way the IRS pursues tax debt. The program can be summarized into three distinct changes or areas of focus:
- The IRS made it easier for taxpayers to avoid or have a federal tax lien withdrawn and doubled the minimum tax debt needed for the IRS to trigger a lien (from $5,000 to $10,000).
- The IRS reduced some of the requirements needed to settle a tax debt through the Offer in Compromise (OIC) option.
- The IRS doubled the maximum tax debt allowed for installment agreements (from $25,000 to $50,000 for individuals) and added a year to the maximum length of installment agreements (from five years to six years).
To reiterate, the three major areas of focus for the Fresh Start Program were: the Offer in Compromise program, the way the IRS files and withdraws liens, and expanded limits for installment payments.
These were changes made to existing programs, rather than new programs in and of themselves. As such, since 2009 (and with further revisions made in 2012), the IRS has made it much easier for taxpayers in debt to pursue ways to refinance, reduce their monthly costs when paying their tax debt, or even cut a substantial portion of their debt (if eligible).
To qualify for a Fresh Start, you must fulfill some general requirements. The IRS will usually only consider helping you resolve your tax debt if:
- You’re up to date on all your tax returns. If you haven’t filed any late returns, make sure to do so. There will be penalties for late filing added to your overdue balance, but without these missing returns, you can’t pursue any meaningful payment options or options for debt relief.
- You’re on-time with your payments. While the IRS will usually lift liens and offer greater leeway if you can prove that you’re capable of honoring their payment plan, and have made multiple payments already, they can also immediately file a new lien if you fall behind on an agreed payment plan.
You send your financial information for the IRS to review. This requirement in particular is usually only important when filing for an Offer in Compromise, wherein the IRS requires your financial information to determine what they can reasonably expect to collect from your income in the coming years, without financially crippling you. - If you’re struggling under a substantial tax debt and aren’t sure where to begin paying it off, it’s in your best interest to contact a tax relief professional immediately. Tax debt not only grows through late payment penalties and interest but may lead to a federal tax lien on your assets and property.
What is a Federal Tax Lien?
When a taxpayer’s debt reaches a certain level, the IRS can file a lien to encourage action on the taxpayer’s account. A lien is a legal claim by a creditor on a debtor’s property, effectively allowing them to claim the value on any assets or property equal to the debt, should they be liquidated. A federal tax lien supersedes any other creditor claims.
Unlike a levy, wherein the government can claim a portion of your wages, clean out a bank account, or sell property on your behalf to cover your debt, a lien does not forcibly remove any assets or property from your ownership. It does, however, affect your ability to seek credit, and can affect your credit score in the long-term. If a federal tax lien is ignored for too long, it may lead to a levy.
The IRS Fresh Start Program changed the minimum tax debt needed to file a lien and made it easier to withdraw or remove a lien. After the Fresh Start Program, you can have a lien withdrawn if:
- You’ve paid your tax debt down to $25,000 or less
- You’ve agreed to a Direct Debit Installment Agreement under which your tax debt is fully paid within 60 months, or before your collection statute expires
- You’ve made three consecutive Direct Debit payments already
You haven’t defaulted on your current or previous installment agreements - Other options for dealing with a federal tax lien include requesting subordination or discharge, wherein the lien is superseded by a selected creditor’s claim, or specific property is freed from the lien, respectively.
These two options may help taxpayers seek refinancing options that allow them to pay their tax debt and have a greater degree of financial flexibility.
What is an Offer in Compromise?
An Offer in Compromise can help taxpayers facing overwhelming debt and low income negotiate a payment plan with the IRS that allows them to pay as much as they can afford to, while forgiving the rest.
In the past, the IRS calculated your reasonable collection potential by taking your monthly discretionary income and multiplying it by five years (60 months).
Under the Fresh Start Program, one of the major eligibility changes include calculating your reasonable collection potential based on what you’re likely able to pay in one or two years (12 to 24 months) instead.
The IRS still requires a full write-up of your financial details, and requests that you contact them with an offer first (you can choose to pay in monthly installments, or a short-term payment plan). They will either accept or offer or make a suggested amendment, which you can accept or appeal.
- The other eligibility requirements for an Offer in Compromise remain relatively strict. You cannot be in the middle of a bankruptcy filing
- You must pay any estimated tax payments
- You must file any unfiled and current tax returns
- You must wait on the IRS to accept or decline your offer (during which your debt will continue to accrue interest)
The IRS has its own online pre-qualifier tool for taxpayers interested in filing for an Offer in Compromise.
How the Fresh Start Program Affects You
Through the changes made in the Fresh Start program, more taxpayers than ever have had their tax debt issues cleared up, while the IRS issued about half as many liens as in the years before. However, taxpayers are still encouraged to be proactive if they want to avoid unnecessary penalties and costs. Contact a tax relief professional about your tax debt today.
Contact Heartland Tax Solutions to learn more or schedule a free consultation today.