Month: October 2023

Tax debt sucks.  This is an irrefutable truth.  If you have a lot of tax debt, this program may be your savior!

If you have the ability to pay your tax debt back over time, then the 72 month installment agreement will be exactly what you need.  How do you qualify?  How do you apply?  Is this the best option available?

We’d all love that “Pennies on the Dollar” settlement, but most won’t qualify.  (take a look at this article to see if you do) And no one wants to pay more than they have to.

Let’s take a look at the IRS Fresh Start 72 Month Installment Agreement and how it can help you. As always, I explain to myself like I’m a 7-Year-Old.

Why does the 72 Month Installment Agreement exist?

The IRS Fresh Start 72 Month Installment Agreement is a repayment plan that allows you to repay your tax debt over an extended period.  Another benefit is interest and penalty will NOT continue to accrue to your account (add to your balance)

The duration (6 years as opposed to a more typical 5 year plan) has been extended 12 months in an attempt to assist small business owners and other taxpayers with their cash flow.

By extending the term by 12 months, your payments are reduced.  Because of the Fresh Start program, your payment would be $833, instead of $1,000 under a 60 month plan.

Your interest and penalty charges will also be less. This is a nice gift.

With these savings, you can put the money back into marketing and make more money.

Ok.  Sounds Good.  How Do I Qualify?

You can’t owe more than $50,000 in federal tax debt.  This is the biggie.  If you are close (for argument, you owe $55k), borrow the money to pay your balance down to the $50k limit.

You must be sure you have filed all required tax returns and if you’re a business with employees, this includes all payroll tax returns.  This needs to be done before you can apply with the IRS.

What Taxes are Eligible?

In my career I haven’t found any tax assessed by the IRS that doesn’t qualify.  For this reason, we’ll assume this includes Income Tax, Payroll Taxes, Self-Employment Taxes and Excise Taxes.

What’s The Big Deal About the Fresh Start 72 Month Installment Agreement?

• The biggie is the extended payback period of 72 months.  By taking advantage of the additional 12 months, you will be reducing your monthly payment.
• This in turn helps alleviate your financial hardship, if only a little.  At this point you should do as many “small things” as possible.  They add up.
• By enrolling you also avoid harsher collection activity.  The IRS can farm out collections to private firms who only collect money.  Those collections horror stories aren’t all urban legends.

How Do I Apply?

• Fill out and submit form 9465 – Installment Agreement Request.  This is the first step.
• If the IRS needs more info, they will request form 433-A.
• Self-Employed taxpayers will need to prepare form 433-B.
• In some cases (like a partial pay installment agreement) the IRS may ask for further documentation.  They will ask for form 433-D.

What would cause a rejection or default?

• The IRS may not agree with your ability to pay a certain amount, so they will ask for additional information.
• You must agree to ongoing tax compliance, so don’t miss filling your returns.  Pay your taxes when required.  Make estimated tax payments if required.  Non-compliance will default you

What’s The Approval Process Like?

For the most part, approval is automatic.  If the IRS feels you may have trouble with your payment, the max would be $694.44, they will request additional information so that they can further evaluate your case.

Can The 72 Month Installment Agreement automatically Take the Money from My Account?

You have the choice to send them a check, or have them auto deduct from your account.  By selecting auto deduct you also receive a reduced application fee.

Should You Seek Professional Help?

I’m a fan of DIY projects.  Generally, though, when someone has a tax problem, I advise them to let a pro handle it.

I think you can handle this option without professional help. If you owe the IRS $25-35,000 or more and have an income that can support an almost $700 payment, you can do the 72 month installment agreement online.  I think the online fee with debit payments is $35.

The IRS may start asking for additional documents, or has questions about your application that you’re not sure how to answer. So at that point you should consider calling a pro.

A Quick and Easy 72 Month Installment Agreement Case Study

Let’s go through a case.  A new client walked through the door today.

Her name is Dianna Banana.  She’s self-employed selling carbonated Lemon Drops at farmer’s markets up and down the west coast. Because of her travels, she’s also late filing her tax returns.

Dianna owes payroll taxes, self-employment taxes and income taxes.  Her total owed is $35,000.  She has not filled her 2022 or 2023 returns so that’s first.

Backwork done

We prepare the 2022 return and her total due is $6,000 ( additionally including late filing penalty).

We prepare the 2023 return and her total due is $7,500 (also including late filing penalty).

Her total due is now $48,500.  After discussing options with Dianna we find her finances are doing well (she kicked her loser boyfriend out) and business is doing great.

She doesn’t have the full amount to pay, but could afford about $1,000 per month.  We recommend the IRS Fresh Start 72 Month Installment Agreement as a solution.

Let’s File The Forms

We prepare and file form 9465 for her and wait for the IRS response.  When filing a 9465 you must be prepared to make your first payment within a month.  It usually takes about 60 days to process and review an application.

After 30 days (and Dianna making her first payment) the IRS comes back asking for more info regarding her business.  So we will prepare form 433-B and financial statements in response to their request.

After receiving the additional documents (including bank statements, credit card statements and any other financial information needed to corroborate her income), the IRS will again take up to 60 days to review her info.  This step very rarely takes 60 days.  I’ve heard back within a week.

2 weeks later the IRS approves the installment agreement.  Dianna has elected to have the IRS auto debit the monthly payment from her bank account.

Dianna is happy and brings me a 6 pack of her Lemon Drops.  After 2 of her awesome Lemon Drops, I’m happy.

Conclusion

The IRS Fresh Start 72 Month Installment Agreement is my favorite option.

People get so caught up in the advertising for “pennies on the dollar” results from those tax resolution firms.  They’re pushing Offers in Compromise if that wasn’t clear.

The reality is very few people are accepted.  About 30% of those that apply are accepted.  Sounds like a big number, right?  It’s not.  That’s of the people who have APPLIED.  I’ve done 2 in 30 years.  To an ethical tax resolution expert, very few would qualify, so there’s no point in applying.  Stealing money from folks with little to spare is just bad juju.

The Fresh Start 72-month Installment Agreement is easy to apply for and they give you an extra year to pay your debt back so you can avoid the crazy aggressive collection activity.

It’s Not Absolutely Automatic

There are qualifications to meet, the most important is the tax debt must be less than $50,000.  If your debt is close but over, find a way to get it below the $50k threshold.

Another requirement is the filing of all returns.  This includes all payroll and excise tax returns if usually done in the course of running a business.

If you qualify this is the best option for you.  I know this disappoints a lot of you hoping to get out of paying anything if possible, but it’s the reality.

Think of it this way.  If you qualify for an Offer in Compromise, you are very close to destitute.  This is why the IRS Fresh Start 72 Month Installment Agreement is the best solution. You must make sure the money will be available.  We always hope for money to be available.

That’s it for today.  If you have questions let me know in the comment.  I’m back after having to take a few months off, but will be posting weekly again.

Stay cool and we’ll talk soon.

JKC

Believe it or not, if you owe the IRS less than $50,000, they consider this a “Small Tax Debt”.

I know.  That’s freaking crazy!  I don’t know about you, but $50k is a lot of money. This is where the IRS Fresh Start program, and specifically their Offer In Compromise option come into play.

When faced with any tax debt, most individuals and businesses become overwhelmed (who wouldn’t?) and find themselves in financial dire straits (They Rock).

Back to the IRS Fresh Start Offer in Compromise.  Uncle Sam understands (the IRS) that not everyone can pay their taxes on time and in full.  This is why they created the Fresh Start programs, with the Offer in Compromise (OIC) available for those with serious financial issues.

The IRS Fresh Start OIC aims to provide an easier (relative to tax debts over $50k) methodology for resolving tax debts, giving taxpayers an opportunity to regain their financial footing.

Explaining the IRS Fresh Start Offer in Compromise

Defined

The Offer in Compromise is a program option that allows taxpayers to settle their tax debt for less than the amount due.  The amount to be paid is a statutory calculation (i.e., not something that is truly “negotiated”)

Do I Qualify?

To qualify you must first owe less than $50,000.  This will allow you to apply using the Fresh Start initiative.  You must also be able to demonstrate financial distress that currently does not allow you to pay towards your taxes.  The duration of this distress also has no foreseeable end point.

What Kind of Taxes Qualifies?

Most taxes charged by the IRS are eligible.  This includes Income Taxes, Payroll Taxes and Self-Employment Taxes.

 Why Apply for an OIC?

Obviously, the biggest benefit of an Offer in Compromise is the reduced tax debt.  The next biggest benefit has to be resolving the tax issue.  This is the kind of thing that can keep you up a lot of nights.  Putting a plan into motion will do a lot for your emotional well being.

What Else?

An Offer in Compromise has three options.  Doubt as to Collectibility, Doubt as to Liability and Effective Tax Management.  For purposes of this paper, we will focus on Doubt as to Collectibility.

What is The IRS Fresh Start Tax Relief Program?

Introduction

The IRS Fresh Start Tax Relief Program is designed to help individuals and businesses who are struggling with tax debt. The Fresh Start program has different options available to you depending on your current tax situation.

The beauty of the Fresh Start program is the simplicity of applying and collecting supporting documentation.  If you owe more than $50k the application process asks for a lot more information.

These are the four payment options available:

• IRS Fresh Start Installment Agreement – This option allows you to pay back all or most of your tax debt over time.  The maximum term is 72 months.
• IRS Fresh Start Offer in Compromise – An Offer in Compromise is the one those Tax Debt companies advertise.  Pay Pennies on the Dollar!!  Yeah.  Maybe.
• Currently Not Collectible (CNC) – While technically not a payback option, if your financial hardship is truly overwhelming, you can ask the IRS to leave you alone.  This status lasts between 6-12 months.  This is a great tools for a tax pro’s quiver.
• Penalty Abatement –  Also not a payback option but a way to reduce penalty and interest charges.

How Can You Qualify for an IRS Fresh Start?

This parts easy.  There are very specific criteria that must be met.  Qualifications are:

• Your tax debt must be LESS than $50k.  If it’s over $50k you can pay it down so it’s less than $50k.  I know.  Easier said than done.
• You must be current with all tax filings. All required tax returns must be filed.  This includes any payroll or excise tax returns.
• If you’re self employed, you must make all required estimated tax payments.  If you are a W2 employee, your withholding must be sufficient.
• You agree to pay your tax debt within the next six years in monthly installments, or within the determined period of your OIC.

There are a few other items:

• If you’re self employed and had an income drop of at least 25%
• You file Single and have income of less than $100,000
• You file married and have income of less than $200,000

Why You Should Strive for the IRS Fresh Start Program

The simplicity.

Look.  This whole process sucks.  You owe the government a lot of money that you don’t have.  You’re feeling overwhelmed and lost.  Asking for help is hard enough, but when you see everything the IRS needs, your head will explode.

That’s where the Fresh Start program comes into play.  The Fresh Start program was design with small tax debts in mind.  The Fresh Start process is a lot less invasive and has a lot of ways to help.  As long as you owe less than $50k.

Applying for an IRS Offer in Compromise

I’m not going to go into the step by step.  I will go over the process and point out items of importance

• Get your documents ready.  For your situation it would be all bank statements, credit card statements, paystubs, leases, notes…anything to prove your situation.
• PrepareIRS form 656.  Self employed individuals will need to fill out forms 433A and 433B.
• You will be asked to verify your monthly income and expenses.  The IRS has limits to the amount you can claim.  These National Standards limits aren’t set in stone, so if you have an expense higher than the standards allow, you may argue the necessity on your application.
• After verifying your income and allowable expenses, what’s left over (your discretionary funds) is used to calculate your offer.
• If you are self employed, there are things you may be able to do to reduce this amount.  Business expenses aren’t limited as much as your personal expenses.
• Add the value of any non business assets to this number.  This last part is why most folks won’t qualify for an OIC.  For example, if you have $50k of equity in your house you won’t qualify.
• For this example, your available discretionary are $500 and your net asset value is $2,500.

Now we decide the method of calculation.

There are 2 methods.  12 month calc, 5 month payback and 24 month calc, 24 month payback..

12 Month Calculation – If you select this option, you must be able to pay the debt off within 5 months of acceptance.

Using the above amounts, your offer would be $8,500 (($500×12)+$2,500).  You would send 20% with the initial application (plus an application fee which amount seems to change daily.  Expect around $200), and upon acceptance you would have 5 months to pay the remaining $6,800.

24 Month Calculation – If you select this option, you must be able to pay the debt off within 24 months of acceptance.

If you need 24 months to pay your debt off, your offer will be $14,500.  The IRS wants your application fee and the first monthly payment (in this case $614.17) with the application (no need to send the 20%).  Once accepted you wold have 24 months to pay the remaining $12,885.83 balance.

Basically, the OIC process involves completing a Collection Information Statement, paying an application fee, and providing at least the initial payment.

The IRS will then review your OIC application.  This usually takes 5-6 months before they get back to you.  I also advis clients to keep collecting your documents proving hardship.  There is a very real possibility the IRS wants to make sure you’re still having financial hardship.

What To Do If You’re Rejected?

You will have 30 days to request an appeal.  The IRS will also provide you with a letter of points they disagree.  This is your map to appeal.  You must address each point individually and collectively.

This is why you should continue collecting your hardship info.  Right around 30% of applications are accepted so it’s just basic math that you will also be rejected.

Prior to submitting the application I go over the weak points with the client.  These are the areas we expect the IRS to take issue with, but we’ve prepared and have an answer waiting for them.

How To Document Financial Hardship

This is the heart of your argument.  As mentioned earlier in the post, your hardship can look like many things.

Bank statements or paystubs show reduced income.  Past due notices and statements show probable negative cash flow.  Rejection letters from lenders show an inability to borrow.

If health is an issue, letters from your doctor and bills showing treatments must be saved.

You aren’t making the same amount of income.  Why?  What happened?  A law change can affect your business.  A natural disaster can happen.  Your biggest client can evaporate.

There are a lot of reasons you finances took a hit.  Dig deep and find out what really happened.

Make Sure You Have Filed all Required Tax Returns.

This is the number 1 reason for delays.  In my experience, its usually a payroll tax return that slows you down.  They won’t review your application if they see a return hasn’t been filed.

Should you Hire a Professional?

I’m a big DIY guy.  This is not a place to be a DIY guy.  Sure, you can get lucky and get an approval, but your chances go way down if you do it yourself, plus I’m confident you will be paying more than you should.

Conclusion

The biggest takeaway is that the Fresh Start program, and specifically the Offer in Compromise are valuable tools for any taxpayer who is struggling with their finances and specifically their tax debt.

While an OIC is a first step towards regaining your financial footing, it’s important to understand the circumstances in which an OIC is the best course of action.

To be able to walk away from the majority of your tax debt, your situation must be really, historically bad (from your perspective.)

For a successful OIC application, your situation must be:

• You must be in the midst of a period of financial distress.
• You must owe LESS THAN $50,000, or can pay your debt down to less than $50k.
• Your personal asset value must be low.  If you have equity in your house you may not be able to qualify.
• If you do have equity, but are unable to get a loan the lending institution is required to give you a letter outlining the rejection.  If you apply for 2-3 loans and are rejected, save the letters for your application.  The IRS takes into consideration your inability to procur funding elsewhere.
• If you choose the 12 month calculation method, you must be ready to pay the debt off within 5 months of approval.
• If you choose the 24 month calculation method, you must be able to pay the debt off within 24 months.

If it looks like you won’t qualify, there are other options available.  And using several options in concert with each other many times will render a good result.

If you have questions, post a comment and I’ll get back to you as soon as I can.

Until then, stay cool.

JKC