Taxpayers who owe back taxes often feel trapped. They’ve already paid their penalties, interest, and fines, and now they’re being hounded by collection agencies. It feels like there’s nowhere left to run.
The IRS Fresh Start program can help taxpayers struggling to pay their federal taxes. The program was expanded in 2018 to include more flexible Offer-in-Compromise terms, which will enable some of the most financially distressed taxpayers to clear up their tax problems more quickly.
In this post, I’ll share with you four Fresh Start options for taxpayers who owe back taxes, and explain how each option works.
This will help you to get back on track without having to pay additional fees.
4 Fresh Start Options For Taxpayers Behind On Their Tax Payments:
- Installment Agreement allows you to pay off your tax debt over time, in monthly payments. This agreement is available to taxpayers who owe $50,000 or less in back taxes.
- Pre-Qualified Offer in Compromise allows certain taxpayers who owe back taxes to settle their debt for less than the full amount owed. This program is designed to help taxpayers who are struggling to pay their taxes and who do not have the ability to pay the full amount owed. Under this program, taxpayers who qualify will be able to settle their debt for a reduced amount, which will be based on their ability to pay.
- Tax Lien Withdrawal: allows taxpayers who have a federal tax lien filed against them have the lien withdrawn if they meet certain conditions. This includes making all required tax payments for the previous three years, filing all required tax returns for the previous three years, and entering into a payment plan with the IRS.
- Extended Payment Plan: allows you to pay your taxes over a longer period of time. This can be helpful if you are having trouble paying your taxes in full. The plan allows you to make smaller payments over time, which can make it easier to pay your taxes and avoid penalties and interest.
Filing for an extension
If you owe taxes and cannot pay the full amount, you still must file your tax return by April 15th. You can request a 120-day extension of time to pay, by completing and mailing Form 9465– Installment Agreement Request, or by contacting the IRS at 800-829-1040.
If you need additional time to file your return, you can request a 6-month extension of time to file, by filing Form 4868– Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
If you can’t pay your taxes in full before the end of the extension and you still owe taxes, then apply to the Fresh Start program. But you must have filed a tax return.
Requesting a payment plan
The IRS has several options for getting you out of a financial jam.
One is requesting a payment plan. With this option, you would work with the IRS to agree on a payment plan that would allow you to catch up on your tax payments and avoid additional penalties.
Once your new plan is approved, the IRS will give you an installment agreement and ask that all future tax payments be made on time.
But, if you fail to make any of the installment payments, your account won’t just be in trouble; it could be referred to a collection agency.
Making An Offer In Compromise
This is the most common option for taxpayers who are behind on their tax payments. In an offer in compromise, you make an agreement with the IRS that you’ll pay back a certain amount of money over a certain period of time. This could be as short as six months, or as long as five years.
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability or doing so creates a financial hardship.
When determining whether an offer in compromise is right for you the IRS considers factors such as;
- your ability to pay
- Income
- Expenses
- asset equity
If you need to apply for an OIC, you must have filed all required tax returns and made all required estimated payments.
You also can’t be in the middle of a bankruptcy proceeding.
If you’re applying for the current year, you need to have a valid extension for your return. And if you’re an employer, you need to have made tax deposits for the current and past two quarters before you apply.
To apply, you must submit a completed Form 433-A, Application for Offer in Compromise, along with supporting documentation. If you cannot pay within 60 days of receiving notice of your offer, you can request an extension by filing a Form 1127. However, if you fail to make any payment during the extended period, interest begins accruing again.
The IRS will calculate your reasonable collection potential by looking at one year of future income for offers paid in five or fewer months and two years of future income for offers paid in six to 24 months. All offers must be fully paid within 24 months of the date the offer is accepted.
The IRS considers many factors in deciding whether to accept or reject an OIC, including;
- The taxpayer’s ability to pay
- The extent of the taxpayer’s compliance with tax laws in the past
- The type of tax owed
- Whether accepting the OIC would promote compliance with the tax laws
The IRS usually won’t agree to an OIC (offer in compromise) unless they think the amount offered is what they could probably get from the taxpayer.
You can use the Offer in Compromise Pre-Qualifier tool on their website to see if you qualify for an offer in compromise before filling out the paperwork. The questionnaire format assists in gathering the information needed and provides instant feedback as to your eligibility based on the information you provided. The tool will also assist you in determining a preliminary offer amount for consideration of an acceptable offer but is no guarantee of offer acceptance.
Applying for Currently Not Collectible status
If you currently can’t afford to pay your tax debt, the IRS may agree to place your account in “Currently Not Collectible” status. This means the IRS has temporarily suspended collection actions against you and agreed not to take any collection action as long as your financial situation doesn’t improve.
To qualify for “Currently Not Collectible” status, you must prove that paying your taxes would create a financial hardship for yourself or your family. The IRS will review your income and expenses to determine whether you qualify. If the IRS places your account in “Currently Not Collectible” status, they may still file a Notice of Federal Tax Lien to protect their interest in your property.
And, if you do eventually have the ability to pay your debt, the entire amount will become due and payable at that time.
Applying for “Currently Not Collectible” status should be considered a last resort option, as it does nothing to reduce or pay off your tax debt.
But if you truly can’t afford to make any payments towards your tax debt, it may be worth considering.
2 Taxpayer resources
There are 2 resources available to help you through these difficult times.
- The Taxpayer Advocate Service (TAS) is an organization that helps taxpayers and protects their rights. TAS can offer you help if your tax problem is causing a financial difficulty, you’ve tried to resolve your issue with the IRS but were unsuccessful, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for TAS assistance, which is always free, they will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778 for more information.
- Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS and can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. They can also provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. To find an LITC near you, go to the LITC page at www.taxpayeradvocate.irs.gov/litc or look up IRS Publication 4134, Low Income Taxpayer Clinic List. You can also find this publication online at www.irs.gov/forms-pubs or by calling the IRS toll-free at 800-TAX-FORM (800-829-3676).
Final Thoughts on the IRS’s Fresh Start
The IRS Fresh Start program can help delinquent taxpayers catch up on their tax debt.
The withdrawal of tax liens under the provisions of this program can help many filers keep or get jobs that can allow them to pay off their balances in full.
TheFresh Start program also offers payment plans for those who owe back taxes, and can help filers avoid wage garnishment or seizure of assets.
The IRS will help you through the forms but don’t think they are your friend. The IRS wants their due. Use the above 2 resources to help, or hire a competent accountant.
