IRS Expands Fresh Start Program for Taxpayers

On May 21, 2012, the IRS announced the expansion of the "Fresh Start" initiative by offering more flexible terms in its Offer-in-Compromise (OIC) program, with the goal of helping a greater number of financially distressed taxpayers resolve their tax problems more quickly than in the past, and reducing the number of tax liens issued.

The IRS said it is adjusting the financial analysis used to determine which taxpayers qualify for an OIC. This should make it possible for some taxpayers to resolve their tax problems in as little as two years, compared to four or five years in the past. Among other changes, the agency is revising the calculation for the taxpayer's future income, allowing taxpayers to repay their student loans, and any delinquent state and local taxes, while expanding the allowable living expense allowance category and amount.

The agency acknowledged that many taxpayers are struggling to pay their bills, and it has been working to make practical changes to the OIC program that will better reflect real-world situations. "This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years," said IRS Commissioner, Doug Shulman. "It is part of our multiyear effort to help taxpayers who are struggling to make ends meet."

An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liabilities for less than the full amount owed. An offer may be accepted after the IRS has examined the taxpayer's income and assets to make a determination of the taxpayer's reasonable collection potential. However, an OIC is generally not accepted if the agency believes the liability can be paid in full as a lump sum or through a payment agreement.

Under the new guidelines, when the IRS calculates a taxpayer's reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. The agency emphasized that OICs must be fully paid within 24 months of the date the offer is accepted.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, the agency said equity in income-producing assets generally will not be included in the calculation of reasonable collection potential for ongoing businesses.

The IRS further noted that allowable living expense standards, which are used by the agency in determining a taxpayer's ability to pay, have been expanded to include additional items, such as credit card payments and bank fees and charges, payments for college loans guaranteed by the Federal government, and payments for delinquent state and local taxes.

The Fresh Start program is part of an initiative started at the IRS in 2008 to help individuals and businesses pay back taxes, and to reduce the number of tax liens issued. The agency announced lien relief for taxpayers trying to refinance or sell a home in 2008, and added new flexibility for taxpayers facing payment or collection problems in 2009. In 2011, the IRS made additional changes to lien policies and expanded the threshold for small businesses to resolve tax issues through installment agreements.

In March 2012, the IRS announced that it is increasing the threshold for using an installment agreement without providing a significant amount of financial information from $25,000 to $50,000. Taxpayers who owe up to $50,000 in back taxes are permitted to enter into a streamlined agreement with the IRS that stretches the payment out over a series of months or years. The maximum term for streamlined installment agreements was raised to 72 months from the previous limit of 60 months. In addition, certain taxpayers who had been unemployed for 30 days or longer, or self-employed individuals who experienced a reduction in income, were given a six-month grace period on failure-to-pay penalties when filing their 2011 tax return if the tax, interest, and any other penalties are fully paid by Oct. 15, 2012.

For more information on the Fresh Start program, consult one of our qualified tax professionals.