The Fresh Start Initiative began as a series of significant IRS collection policy changes in 2011/2012 to help taxpayers who were struggling to pay their back taxes. There were two major announcements of changes to IRS collection policy. All of these policy changes are still in effect today.
2011: Relaxing lien filing criteria and installment agreement terms
In 2011, the IRS made several changes that provided relief from federal tax liens and allowed more taxpayers to obtain favorable payment terms with the IRS.
- Relaxed lien-filing criteria: The IRS increased the threshold amount of outstanding taxes that would allow the filing of a tax lien. For taxpayers who were not in a qualifying installment agreement and owed back taxes to the IRS, the threshold amount increased from $5,000 to $10,000.
- Ability to request lien withdrawal: Taxpayers were given the opportunity to have their tax lien withdrawn if they met certain criteria.
- Expansion of payment terms: The IRS expanded its streamlined payment plans by increasing the streamlined installment agreement threshold from $25,000 to $50,000. The IRS also increased the time to pay the balance owed from 60 to 72 months. Streamlined installment agreements have always allowed taxpayers to obtain a payment plan, obtain more favorable payment terms, and critically – avoid the filing of a federal tax lien. Taxpayers who obtained a streamlined installment payment agreement are now able to avoid a tax lien if they paid by direct debit on balances between $25,000 and $50,000.
In 2011, the IRS also emphasized that taxpayers who owed any amount should be able to pay over 6-years on their current budget. Previously, IRS collection agents tried to maximize the monthly payments from taxpayers by disqualifying certain discretionary expenses from the calculation of the monthly payment amount the IRS would require. Fresh Start made it clear: If a taxpayer can pay the outstanding debt within 6-years (or the term of the collection statute, whichever is shorter), the IRS may allow discretionary expenses. The IRS calls these expenses “conditional” expenses, meaning taxpayers can have them allowed on the condition that they pay within 6 years.
2012: Changes to the Offer in Compromise Program
In 2012, the IRS made more changes. Most of these changes gave more taxpayers access to the Offer in Compromise (OIC) program.
The IRS made the OIC program more attractive because it revised the calculation of the taxpayer’s future income, allowed taxpayers to repay student loans, allowed taxpayers to pay state and local delinquent taxes, and expanded the allowable living expense category and amount. The most significant change was to reduce the amount of the offer for those who qualified for an OIC by recalculating a taxpayer’s reasonable collection potential using a shortened etime frame over which the future income is calculated.
For example, a taxpayer who qualifies for an OIC (see this article about OIC qualification) and has $500 in monthly disposable income and $5,000 in net equity in assets would see their OIC offer amount drop from $29,000 (pre-Fresh Start) to $11,000 with Fresh Start. The reason is that the Fresh Start Initiative changed IRS collection policy to lower the total number of months of income provided to the IRS from 48 to 12 months if the offered amount would be paid off in 5 months or less. If the offered amount is to be paid in 6 to 24 months, the monthly disposable income is calculated over a twenty-four-month period.
|Example: assume qualifies for OIC, has monthly disposable income of $500 and asset net equity of $5,000
||Offer amount: prior to Fresh Start
||Offer amount: Fresh Start
|Net equity in assets (1)
|Monthly Disposable Income (amount that could be paid to the IRS in a monthly installment agreement)
|Future income multiplier FRESH START changed the future income to be paid to the IRS in an OIC from 48 to 12 months
|Future income (2)
|Offer Amount (1) + (2)
Fresh Start made the OIC more attractive. In our example, it reduced the amount of the offer by $18,000. However, after an initial surge in OIC applications in 2012 and 2013, OIC applications and approvals have declined. In fact, there were less OICs accepted in 2019 (17,890 accepted) compared to the last pre-Fresh Start year in 2011 (20,000 accepted).
Despite the commercials, accepted OIC’s remain rare. In 2019, over 20 million taxpayers owed the IRS but only 17,890 were able to obtain an OIC.
The first consideration is to determine whether the amount owed can be reduced. Penalty abatement, amending returns to correct the amount of tax due, and requests to the IRS for audit reconsideration or tax return adjustments should all be considered if they apply.
If a taxpayer still owes the IRS and cannot pay, there are collection alternatives to consider including extensions to pay and installment agreements that allow for payment of the tax bill over an extended period. Taxpayers experiencing financial hardship can also look for a temporary deferral of payment called “currently not collectible.” If taxpayers qualify and can pay a reduced amount to settle their tax bill, they may obtain an offer in compromise.
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