Regardless of how you incurred the tax debt, though, it’s important to take action now. While the IRS won’t take a “forgive and forget” approach to your tax debt, they do offer several methods to help you pay down and eventually eliminate the outstanding balance. The Fresh Start program covers several of these options.
What is the IRS Fresh Start program?
The Fresh Start initiative, established by the IRS in 2011, is an umbrella term for a group of programs available to individual taxpayers and small businesses that owe money to Uncle Sam. The IRS launched Fresh Start in the wake of 2008’s Great Recession to help struggling taxpayers get back in good standing.
The Fresh Start program offers several options that allow small business owners to clear their tax liabilities, including an Offer in Compromise, installment agreements, penalty abatement, or the Currently Not Collectible status. These relief programs allow qualified taxpayers to reduce their debt, pay down debt in installments, eliminate penalty charges, or stop all collections proceedings.
Under the Fresh Start program, taxpayers benefit because they can pay down their debt while avoiding more severe consequences like tax liens, levies, or jail time. Fresh Start also makes the IRS happy because it allows them to collect something instead of nothing.
How do I apply for the Fresh Start program?
To qualify for any Fresh Start program, the IRS requires that you be fully current with all tax returns.
In addition to ensuring all your past financial records are organized, actions you can take to make your Fresh Start application process easier include:
- Contacting a tax attorney, enrolled agent, CPA, or tax resolution firm to discuss your legal options for tax debt relief. Many of these professionals offer a free consultation for these matters.
- Compiling all of your business’s financial records for each tax year that will be addressed in the application.
- Obtaining and completing the applicable forms from the IRS’s website.
- Gathering any other documentation necessary for your case, i.e., court and hospital records for tax abatement applications.
If you’re a small business owner and behind on your bookkeeping, Bench’s team of experienced specialists can get you caught up fast, as well as help you find deductions that can decrease your total tax debt. Learn more.
We can also put you in touch with one of our trusted tax resolution partners, like 20/20 Tax Resolution. They can help you navigate the application process and make sure to address any of your concerns throughout the process. They’ll even represent you in front of the IRS.
How do I know which Fresh Start solution is right for me?
Because there are many options under the Fresh Start program, working with a tax professional—like a tax attorney, enrolled agent, CPA, or tax resolution firm—to determine which program is appropriate for your situation is always a good idea. The IRS denies many applications for tax relief simply due to incomplete or inaccurate information.
If you’d like to start your research before reaching out to a professional, read on for a more detailed breakdown of the Offer in Compromise, installment agreements, penalty abatement, and the Currently Not Collectible status.
Offer in Compromise
The IRS recognizes that a small business owner may have legitimate reasons for being unable to pay their back taxes or even file for an extension. An Offer in Compromise, or OIC, is an agreement between you and the IRS that reduces the amount of taxes you owe.
The IRS may approve the OIC agreement if your original debt balance is considered uncollectible because your liabilities exceed your assets and income. However, this doesn’t mean that you can haggle with the IRS on any amount to settle your tax bill. Instead, the IRS arrives at a reduced tax debt figure with the Reasonable Collection Potential, or RCP. This is the final amount that the IRS estimates it can fully collect.
Learn more: What Are Assets, Liabilities, and Equity?
The IRS recently made the following changes to make it easier for taxpayers to qualify for the OIC program:
- Revised the taxpayer’s future income calculations to only look at one year of future income for offers that are payable in five months or less, and two years of future income for offers payable in six to 24 months.
- Allow taxpayers to repay student loans as well as any delinquent state and local taxes.
- Expanded the Allowable Living Expense, which consists of expenses the IRS determines are necessary for the taxpayer’s health and welfare.
The IRS offers two ways for you to pay your tax debt with an OIC.
- Lump sum: This amount is paid within five months and must include 20% of your offer amount with the application.
- Payment plan: The IRS establishes a 24-month payment schedule. The first payment must be sent with the application fee (the fee as of 2023 is $205).
There are pros and cons to using the OIC as a tax debt payoff solution.
Pros:
- Your tax debt amount is substantially reduced.
- There are more reasonable, affordable payments through a negotiated plan.
- It prevents the IRS from garnishing wages and other asset seizures.
- It removes any tax liens on your business.
Cons:
- If you fail to qualify after applying for an OIC, the IRS can use your information to rush collection on the debt in other ways.
- Applying for the OIC is a tedious, time-consuming process, requiring a substantial amount of financial records. It can take 7-12 months before it is approved, which means months of payments while it’s under review.
- After filing for an OIC, you are no longer allowed to use any tax credits or other benefits in the following year. You must also forfeit any tax refunds the next year. The refunds are applied to your tax debt.
- The OIC application process can be expensive. In addition to the application fee, you must make an initial payment amount. This amount is either 20% of the total amount you’re offering to pay, or your first monthly installment. Even if you are not approved, this amount is nonrefundable.
- Some details of your OIC information will be on public record.
To qualify for the OIC, you must be up-to-date on all business tax form submissions. A history of bankruptcy proceedings automatically disqualifies you from eligibility.
Check your eligibility for the OIC by completing an online pre-qualifying questionnaire. After confirming eligibility, visit the OIC application package containing all the necessary forms and step-by-step instructions.
Installment Agreement
If you don’t qualify for the OIC, the IRS offers payment installment agreements as an alternative solution. An installment agreement allows you to pay off your tax debt in more affordable monthly payments.
If you owe less than $50,000, you can apply for a Streamlined Installment Agreement or SLIA. In this agreement, you pay the entire debt balance, including any added penalties and interest charges, within 72 months. The SLIA requires you to pay the installments via direct debit from your bank account.
The SLIA can’t be used if your business owes more than $50,000 in back taxes. However, the IRS does offer other types of installment agreements that can address your specific debt situation, and you can apply for the SLIA if you can pay your balance down to the $50,000 threshold.
The installment agreement has its share of pros and cons too:
Pros:
- Installment agreements mean a customizable monthly repayment plan that is easier to manage.
- An installment agreement demonstrates your intent to repay your debt, which the IRS recognizes with less-severe penalties.
- You can pay off the remaining balance of your debt any time during the 72 months without additional fees.
Cons:
- Interest and penalties still apply and will continue to increase the original amount of the debt.
- Enrollment fees can run as high as $225.
- The agreement doesn’t stop the IRS from issuing a federal tax lien against your business. However, any liens in place when you start the plan are removed after several payments are made.
- If you default on the installments, the IRS can revoke the agreement and penalize you.
If you owe $25,000 or less, you can apply online for a long-term installment agreement. This requires you to establish an online account with the IRS, verify your identity, and provide the IRS with information about your business.
If you cannot apply online, you can complete and mail the required forms to the IRS or apply by phone. The phone number to call is 1-800-829-0922.
Penalty Abatement
The IRS automatically adds penalties to your outstanding debt when you fail to file a return, pay on time, or deposit any required taxes. If you don’t take action, these penalties quickly add up and increase your total tax debt amount.
The good news is that penalty abatement (or relief) is another possible option to reduce your total tax liability. Under this program, penalty charges are forgiven, but interest continues to accrue on the unpaid tax balance.
Applying for a tax abatement isn’t an easy process, though. The IRS requires you to show reasonable cause to have the penalties removed, under strict requirements. “Reasonable cause” includes natural disasters, fire, the inability to obtain records, or death or serious illness or injury directly affecting you or a member of your immediate family.
The IRS requires documentation to prove the reasonable cause along with the penalty abatement letter. Your word alone won’t do—court and hospital records may be necessary to substantiate the reasons you need the penalties removed.
To qualify for a first-time abatement, you must meet the following criteria:
- You had no tax penalties for three years prior to the application.
- You paid previous taxes or have an arrangement with an installment agreement.
- You have been compliant with filing previous returns.
If you receive a notice from the IRS, the first step is to contact them by phone at 1-800-829-1040 to verify whether the penalty is valid. If it is, you can get more information on how to get relief through their reasonable cause requirements.
Currently Not Collectible
The Currently Not Collectible status, or CNC, is the IRS’s way of putting the brakes on the collections process. Under the CNC, the IRS halts wage garnishments, collection actions, and any deferred debt payments.
The IRS determines if your case is eligible for CNC status by comparing your total positive income and investments with the national and local standard living expenses. These expenses include everyday living necessities, health care, housing, and transportation costs. If the IRS determines that paying off your tax debt after these expenses puts you at risk for severe financial hardship, they will consider the account uncollectible.
Your account can remain in the CNC status indefinitely as long as your financial status doesn’t change. The IRS will periodically review your account to see if you can begin making full or partial payments as your financial situation improves.
If your income does not improve after the IRS’s 10-year statute of limitations for collection runs out, the IRS writes off the tax debt. If your financial status is long-term or even permanent, CNC is your best option for tax relief.
To prove financial hardship for the CNC status, file IRS Form 433-B to document your business’s collection information. You will need to list detailed information on all of your assets and their market values, as well as how much income you earned and spent in the last three months.
Get back on track with the Fresh Start program
There are many situations that can cause you to fall behind on your taxes, but when this happens, it’s important that you follow up as soon as possible with the IRS to resolve the debt. With the IRS Fresh Start initiative, there are several ways to ease your tax burden through affordable payment agreements.
If you're a small business owner who needs help getting started, chat with our specialized team about your options today.
