IRS Fresh Start Program — Requirements & Application
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The IRS Fresh Start Program, isn’t exactly a ‘new’ program given how long it’s been around. First introduced in 2011, when the IRS implemented a series of significant operational policy changes collectively known as the “Fresh Start” initiative” offers taxpayers an opportunity to settle or resolve their outstanding tax liabilities without severe financial consequences. Whether you owe back taxes, face wage garnishments, or are under the threat of a lien, this program is designed to ease the burden and provide relief through modified repayment terms and penalties.
Let’s walk through the many qualifications, requirements, and steps needed to take advantage of the program. We’ll also dive into relevant sections of the IRS Code and provide citations to ensure you understand the legal backing of these provisions.
What is the IRS Fresh Start Program?
The IRS Fresh Start Program was developed in response to the financial struggles many Americans faced in the aftermath of the 2008 economic downturn. Its goal is to help individuals and small businesses resolve their tax issues through payment plans, Offers in Compromise (OIC), and Penalty Abatement.
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The program primarily helps taxpayers by:
- Reducing tax liens: The IRS raised the threshold for filing a tax lien from $5,000 to $10,000, which offers more protection to struggling taxpayers. Please note, this does not impact the ability for the IRS to enforce a statutory lien, which is automatic for most IRS balances. By filing a tax lien against property, it “perfects” a lien against property and assigns the priority of the lien. The IRS generally does not enjoy a priority among lien holders, and must ‘stand in line’ in order of other lien holders.
- Expanding installment agreements: The program introduced new long-term installment payment options for more manageable monthly payments.
- Enhancing the Offer in Compromise (OIC): The OIC program was expanded to include more taxpayers who are unable to pay their full tax debt. The process to receive an Offer in Compromise was streamlined to make it easier, albeit there are many rules and requirements, and it’s highly advisable to work with a tax professional to navigate the process because there are several downsides and negatives to applying if your application is denied.
- Penalty relief: Penalty abatement has been expanded for taxpayers experiencing financial difficulties. Again, it’s highly advisable to work with a tax professional to navigate the process because the rules are complex and it’s often cheaper to pay a professional than to miss out on potential relief.
Requirements to Qualify for the IRS Fresh Start Program
The IRS Fresh Start Program isn’t automatically granted. In fact, despite the many ads on the radio and TV, the taxpayer must meet the qualifications or waste time and effort only to find their applications are denied. Taxpayers must meet specific eligibility requirements to qualify for its provisions. Below are the requirements for the primary relief options under the program:
1. Installment Agreements
An installment agreement allows you to pay off your tax debt over time through monthly payments. Under the Fresh Start Program, installment agreement options have been expanded.
Eligibility:
- Tax Debt Threshold: Your tax debt must be $50,000 or less. If you owe more than $50,000, you may still qualify by paying down your debt to meet this threshold. This is not to be overlooked, because by making strategic payments, it’s possible to transition from a taxpayer who doesn’t qualify into one that does. Knowing which tax obligations to pay is key to the best success, as making general payments may not be helpful in the long run.
- Filing Compliance: You must have filed all required tax returns. The IRS requires compliance before setting up an installment agreement. Generally, a taxpayer who has properly filed their tax returns for the last six years will be in compliance. Often, a taxpayer will have one or more tax reporting years beyond six years, and knowing which, if any beyond six years tax returns are required is important.
- Payment Timeline: The IRS offers streamlined installment agreements for debts under $50,000 that can be paid off in 72 months or less. It’s essential to understand what obligations are better to be paid than others, as well as establishing what the amount of debt is AFTER potential adjustments the taxpayer is entitled to before determining the amount and if it’s actually above or below the time and amount requirements.
IRS Code Reference: For further reading on the rules and regulations, a taxpayer can review some of the key points by searching through the code and finding the applicable installment agreement provisions are primarily covered under 26 U.S. Code § 6159 — Agreements for payment of tax liability in installments.
How to Apply:
You can apply for an installment agreement online via the IRS website, through Form 9465, or by contacting the IRS directly. While a taxpayer can spend the time and effort learning the code and attempting to represent themselves, it’s highly recommended that you hire a professional that knows the code and can review your specific facts and circumstances to determine the best course of action.
One must know more than than IRS code, one must also know the IRS manual as it relates to the procedures the IRS operates under. Once approved, ensure that you make each payment on time, as failure to do so may result in default and additional penalties.
Another important vital factor is that VERY often, the best resolutions ARE NOT achieved at the Revenue Officer (RO) level, they must go to the Appeals Level to get approved. In other words, a resolution may get denied at the first level, only to be approved at the secondary level. Knowing how this process works is why tax professionals are able to add value and why taxpayers with tax debt hire a professional.
2. Offer in Compromise (OIC)
The Offer in Compromise (OIC) is a settlement option that allows you to pay less than the full amount you owe. The Fresh Start Program made the OIC more accessible by expanding the financial criteria used to determine eligibility. This is the most common resolution program known by taxpayers due to the massive amount of advertising done by many large and sometimes questionable ‘tax mills’ promoting the program. It makes sense, after all, who doesn’t want to pay ‘pennies on the dollar’ owed to the IRS? However, the facts speak for themselves.
The IRS provides statistics on the Offer in Compromise (OIC) program and on average, only about one in three applications for an Offer In Compromise are accepted by the IRS. That’s why it’s important to first determine if you qualify or not.
1 Reason Tax Solutions will ONLY charge you to determine if you qualify or not at first, instead of charging a much larger amount to process an application before we know if you have a very good chance of success (or not). This is a much better approach because for most people, it saves them a lot of money. According to the information we have available at the time of writing, only about one in four (25%) of Offers in Compromise were accepted in fiscal year 2023.
For taxpayers falling victim to unscrupulous advertisers and marketing, that means about three out of four taxpayers paid a large fee to have an Offer in Compromise submitted for them, only to have them rejected. Not only that, during the time of processing by the IRS, it also tolled the amount of time the IRS can come after the taxpayer, meaning it extended the statute of limitations for the collection of the debt, adding insult to injury. Moreover, sometimes, a payment plan can result in LESS being paid to the IRS than an Officer in Compromise.
This is why it is so important to have a tax professional who is not simply trying to sell you expensive services, and is trying to find the best strategy for you to resolve your tax debt obligation at the lowest cost to you.
Eligibility:
- Inability to Pay: You must demonstrate that you cannot pay the full amount owed based on your income, assets, and living expenses. This is important because the fact remains that most don’t want to qualify, because it means you’re not making as much money as you would otherwise want to. Generally, it takes a knowledgeable tax professional to understand what income does and does not qualify to determine your ability to pay the tax debt. Some expenses you may not have or even thought about can influence your ability to pay. In other words, there may be household income you didn’t think will be added, and additionally, other expenses you COULD have (and want) that you don’t have that may diminish your legal amount you have to pay.
- Filing Compliance: Like with installment agreements, you must be up to date on all tax filings. Generally, this means the last six years of tax return obligations, albeit it does vary depending on the facts.
- Financial Disclosure: The IRS will assess your financial situation thoroughly using Form 433‑A (OIC) for individuals and Form 433‑B (OIC) for businesses. Again, for those who don’t know what can and will not influence the amounts, it is important to have a professional guide and manage your financial reporting forms so they are presented as best they legally can be.
The OIC program looks at many things, including three major factors:
- Doubt as to Liability: You believe the IRS has made an error in assessing the tax owed. This happens why more often than most people think it should. So, YES, the government does make mistakes from time to time, which is not totally unsurprising to many.
- Doubt as to Collectibility: You are unlikely to be able to pay the full amount due. So many factors go into this, it’s difficult to even begin a discussion on all the facts that make up what is considered collectible and what is not, and when.
- Effective Tax Administration: While you technically owe the debt, paying it would create an undue financial hardship. As discussed previously, often the best resolutions are found at the appeals level, where an IRS officer also looks to determine if it’s in the best interest of the government to spend the limited time and resources available in an attempt to collect the debt. While self-servicing, it’s my strong belief and understanding, a TAX ATTORNEY is your best option because the IRS knows a tax attorney is able to take your case the distance and into Federal Court, while any other tax professional simply cannot. The IRS knows if you don’t have a TAX ATTORNEY, you’re limited in your options as to how far you can dispute the amount owed, and that is a factor to consider.
IRS Code Reference: Offers in Compromise are governed under 26 U.S. Code § 7122 — Compromises.
How to Apply:
You can apply for an Offer in Compromise by submitting the proper forms along with an application fee (the application fee may be waived for low-income taxpayers). If the IRS accepts your offer, you must comply with all future tax filings and payments.
3. Penalty Abatement
Penalties for unpaid taxes can significantly increase your debt. The Fresh Start Program provides for penalty abatement, particularly for the Failure-to-File Penalty and Failure-to-Pay Penalty.
Eligibility:
- First-Time Penalty Abatement: If this is your first penalty, the IRS may waive it under the First-Time Abatement Policy if you have filed all past returns or arranged to pay what you owe.
- Reasonable Cause: You may qualify for penalty abatement if you can demonstrate reasonable cause for failing to file or pay, such as a serious illness, natural disaster, or other significant personal hardship.
- A taxpayer will always want to first use a reasonable cause to remove penalties, because it’s possible, if the facts support it, that a taxpayer may have one year penalties abated due to reasonable cause, and then, once those fees are removed, then subsequently have a first-time penalty abatement, allowing for more than one year’s worth of penalties removed. However, without a tax professional managing the process, a taxpayer could get ‘stuck’ with more penalties than they legally would have to pay simply by not understanding and knowing the process to maximize the relief available.
IRS Code Reference: The authority for penalty abatement lies in 26 U.S. Code § 6651 — Failure to file tax return or to pay tax.
How to Apply:
You can request penalty abatement by submitting a written statement or calling the IRS to explain your situation. Use Form 843 to request abatement or refund of penalties.
Next Steps to Take Advantage of the IRS Fresh Start Program
If you believe you qualify for the IRS Fresh Start Program, here’s a step-by-step guide to begin the process:
1. Assess Your Tax Situation
Begin by gathering information about your current tax liability, including:
- Total tax debt.
- Any penalties and interest that have been added to your account.
- Your financial situation, including your assets, income, and expenses.
You can obtain this information through your online IRS account or by contacting the IRS directly for a transcript.
2. Ensure Filing Compliance
To take advantage of any of the Fresh Start options, you must have filed all required tax returns. The IRS will not approve installment agreements or offers in compromise if your filings are incomplete or delinquent. Make sure to submit any outstanding returns or resolve any filing errors.
3. Choose Your Relief Option
Evaluate which Fresh Start option is best suited for your situation:
- Installment Agreement: If you can make monthly payments but need more time to resolve your debt.
- Offer in Compromise: If paying the full tax amount is unrealistic, and you meet the financial criteria.
- Penalty Abatement: If penalties have made your debt unmanageable and you qualify for relief due to reasonable cause or first-time abatement.
4. Submit the Appropriate Forms
Once you’ve chosen the best option, submit the necessary forms:
- Form 9465 for an installment agreement.
- Form 656 and financial documentation for an Offer in Compromise.
- Form 843 for penalty abatement requests.
Ensure all forms are filled out accurately, and provide all supporting documents (such as bank statements, tax returns, and pay stubs) to avoid delays.
5. Stay Compliant
After entering into a settlement agreement, it’s crucial to stay compliant with all future tax obligations. Failure to file future returns or make required payments will result in penalties and could void any agreement you have in place.
6. Contact a Tax Professional
Navigating the IRS Fresh Start Program can be complex, and mistakes in the application process could lead to delays or denial. Consider reaching out to a tax professional who specializes in tax resolution to guide you through the process and ensure that you meet all requirements. Give 1 Reason Tax Solutions a call or email to find out how we can assist you.
Conclusion
The IRS Fresh Start Program provides essential relief options for individuals and businesses facing overwhelming tax debt. Whether through an installment agreement, Offer in Compromise, or penalty abatement, taxpayers can resolve their debt while avoiding severe financial hardship.
By understanding the program’s eligibility requirements and following the necessary steps to apply, you can take the first step toward financial relief and a fresh start.
For further information and reading, you can refer to the following IRS codes and regulations at the time of writing:
- 26 U.S. Code § 6159 – Installment Agreements.
- 26 U.S. Code § 7122 – Compromises.
- 26 U.S. Code § 6651 – Penalty Abatement.