The IRS Fresh Start program is a great way to deal with your tax problems.
The IRS Fresh Start program was created because it has become “normal” for people all over the United States finding themselves overwhelmed with the burden of big tax debts.
The Fresh Start Program was created to provide relief to individuals and small business owners facing tax debts of less than $50,000.
If you’re facing a gigantic pile of unpaid taxes, the Fresh Start program will have an option available to lighten your financial load.
Introduction
The IRS Fresh Start Program exists to help struggling taxpayers get out in front of their tax obligations.
The IRS Fresh Start program has 4 available “options” that can assist with resolving a myriad of typical tax problems. The program’s objective is to simplify payment plans, reduce or eliminate penalties (and the interest related to the penalty), and even settle tax debts for less than the full amount owed.
How Do I Qualify for the IRS Fresh Start Program?
To qualify for the Fresh Start Program you need to meet one of these initial requirements:
- You’re self-employed and had a drop in income of at least 25%
- You’re single and have an income of less than $100,000
- You’re married and have an income of less than $200,000
- Your tax debt balance is less than $50,000
Individuals with tax debt below $50,000 and small business owners facing financial hardships are the primary beneficiaries
Meeting the above criteria is just the first step. You must be current with all tax return filings (income tax and payroll tax if a small business).
If you meet one of the above qualifications AND are current with your tax return filings, you then go on to the application process.
Depending on the option you are pursuing, you would now prepare the appropriate form and submit with all corroborating documentation. We’ll talk a little about the application process in a bit.
All The Good Things About the IRS Fresh Start Program!
- Installment Agreement: This is the most popular option. This option allows you to make payments over a set period (up to 72 months). The Fresh Start program simplifies the process, allowing for more individuals and small businesses to take advantage of the simplified application process and manage their tax debts.
- Offer in Compromise (OIC): This is the option almost everyone wants to use. If you qualify, you could conceivably eliminate thousands in tax debt!
Here’s the rub though. Most of you won’t qualify. This option is only available to those in the most financial distress.
If you do qualify, this is the way to go. - Penalty Abatement (Relief): Penalties are statutory. The IRS is required by law to charge you a penalty when you file or pay late. However, there are a few arrows in the quiver which allow for penalty abatement.
The Fresh Start program has a few ways to either reduce or completely eliminate penalties, and the associated interest. Generally speaking, removing some of the penalty and interest will happen as long as you always apply for a First Time Abatement.
Application Process
Applying for the IRS Fresh Start Program involves specific steps:
- Installment Agreement: Prepare Form 9465 to request a monthly payment agreement. Since your debt is less than $50,000 the streamlined process helps you set up a payment plan you can stay on.
- Offer in Compromise: Prepare Form 656 to apply for an Offer in Compromise. Since you’re now asking the IRS to forgive some fo your tax debt, the documentation needed to apply is more in depth than that needed for the installment agreement.
Your Offer in Compromise application will include your current income and expenses, plus a personal financial statement showing your current assets and liabilities.
The Good, Bad and Ugly of the IRS Fresh Start Program.
The Fresh Start Program is an invaluable tool you can use to resolve or reduce your tax problems, but there are a few things you need to keep in mind.
- Credit Impact: Your credit will be negatively affected. To what extent it is really up to you. Make sure to address your tax problems BEFORE the IRS has to resort to liens and levies.
- Compliance: You MUST stay current with your tax filings. Even if you think you owe, file your returns.
People don’t realize that filing and owing is a lot cheaper than filing late and owing. File late and you can’t pay? Add an additional 25% to your tax bill for late filing. File on time and no 25% penalty, just late payment penalties (which you would have anyway since you couldn’t pay).
I just saved you 25%. I’ll send you a bill. :^) - Application Rejection: In my career I haven’t seen many IRS Fresh Start applications rejected. Under the Fresh Start program, the only rejections would be because of inconsistent, missing or unverifiable info.
I stress honesty in all my other articles, and honesty is paramount. The IRS already has a lot of your information. Don’t lie or withhold info. This will almost guarantee a rejection and renewed IRS collection activity. - Professional Advice: Although self-serving, I recommend you engage a professional. Not a tax preparer, but a tax resolution specialist. If you hire your tax preparer, make sure they are capable of handling your specific case.
You can probably handle a straight Installment Agreement, but an Offer in Compromise, penalty abatement or requesting Currently Not Collectible status would probably be better served hiring someone to handle this who has done it before. - Tax Limit: $50,000. If you owe more than $50,000 you don’t qualify.
Don’t let this stop you. If you are able to borrow, or have some cash available, paying the tax debt down to under $50,000 is in many ways worth it.
Maintaining the Fresh Start qualifications reduces the amount of paperwork, and simplifies the actual application process. Once your tax debt rises above the $50,000 threshold, the documentation needed for approval at least doubles.
2023 Updates and Changes
The IRS constantly makes changes to their programs. The biggest change they’ve made in the 2023 program is loosening the RCP (reasonable collection potential) calculation.
There was also some loosening of the Offer in Compromise limits. I’ve seen cases where the IRS has forgiven up to 90% of back taxes.
Every year they make changes to improve the application process, while also allowing for a higher dollar value of collections.
Conclusion To the IRS Fresh Start program
The IRS Fresh Start Program is not a specific program to get you out of paying your taxes. The Fresh Start program is a collection of options you can use and combine to assist with getting you out of tax Hell.
Choose between an Installment Agreement, Offer in Compromise, Penalty abatement and/or Currently not Collectible status to resolve your problems.
You can use one or more options depending on your situation. As an example:
Anya owed $51,000 on her 2014 income tax return. This tax was from the sale of some stock her dad gave her. We will assume the tax return was properly prepared, but I always redo the returns of the tax years in question. Amending an improperly prepared return is a lot easier than negotiating with an IRS agent. So here’s what I’d do:
- How much of the total debt is penalty? Apply for a First Time Abatement to remove the first penalty assessed. This will also reduce the interest charged on that specific penalty.
- How much time is left on the IRS collection clock? The IRS has 120 months to collect a tax debt from the assessment date. The IRS has 36 months left to collect Anya’s tax debt.
- What is Anya’s financial situation? This is used to determine what tack is best for Anya under these specifics. In this case, Anya has $100,000 of equity in her house. This would eliminate the Offer in compromise option since her equity exceeds the tax debt.
- Since there are 36 months remaining on the statute of limitations a quick calculation renders a $695 payment if calculated over 72 months (a normal Installment Agreement) and $1,389 if calculated over 36 months.
- Anya could afford a $700 monthly payment.
- I would negotiate a Partial Pay Installment Agreement for Anya. The IRS only as 36 more months to collect and Anya can only afford $700 a month.
- As long as Anya remains compliant with her tax filings and payments, when the term has expired, she will have paid $25,200 instead of $51,000.
There you have it. The IRS Fresh Start program will be used in the majority of cases. The biggest qualifier in my experience is the $50k tax limit. With the ease in which the Fresh Start program allows taxpayers to resolve their outstanding tax issues, this is the easiest way to go.
Give it a try. If it becomes overwhelming, you can always reach out to a tax resolution specialist.
So, there you go. I hope you can gleam some knowledge from my words. If not, shoot a comment my way and I’ll get back to you.
Thanks and stay cool!
JKC