IRS Expands Fresh Start Initiative:
Help For Taxpayers Who Are in Financial Distress
Written by: Steven J. Fromm, J.D., LL.M. (Taxation)
Building on earlier steps initiated in 2008 to help taxpayers buffeted by the economic slowdown, the IRS recently (March 2012) enhanced its "Fresh Start" initiative. The IRS has announced two important changes to help taxpayers in financial trouble:
Fresh Start Penalty Relief
Many of the actions that economically-distressed taxpayers would like the IRS to take to assist them cannot be done under the tax laws. The IRS cannot stop interest from accruing on unpaid taxes. The IRS also cannot move the filing deadline.
However, the IRS recognized that it can take some actions to help taxpayers who want to pay their taxes but cannot because of job loss or under-employment. In 2011, the IRS launched its Fresh Start initiative. The IRS made some taxpayer-friendly changes to its lien processes and also enhanced its streamlined installment agreement program for small businesses.
Taxes must be paid when due. This year, the deadline for filing individual returns is April 17, 2012. Taxpayers may request an automatic six-month extension but an extension does not provide additional time to pay.
Individuals who do not file by the deadline may be subject to a failure-to-file penalty. The IRS also may impose a failure-to-pay penalty if a taxpayer does not pay by the due date. The rules for the penalties are inter-related and are also complex.
Both the failure-to-file penalty and the failure-to-pay penalty may apply in any month. In these cases, the five percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Now, the IRS is granting a six-month grace period on failure-to-pay penalties to certain wage earners and self-employed individuals. The IRS explained that the request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012.
The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.
Penalty relief is not available to all individuals. The IRS is limiting penalty relief to:
- Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
- Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
Penalty relief is also subject to income limits. Your income must not exceed:
- $200,000 if your filing status is married filing jointly or
- Not exceed $100,000 if your filing status is single or head of household.
Additionally, the IRS has imposed a cap on the balance due. Penalty relief is restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.
An installment agreement allows taxpayers to pay taxes in smaller amounts over a period of time. Generally, individuals who owe less than $25,000 may qualify for a streamlined installment agreement. "Streamlined" means that taxpayers do not have to file extra information with the IRS, such as Collection Information Statement (Form 433-A or Form 433-F). The streamlined process is intended to be as simple as possible.
Effective as of March 2012, the IRS has made the following changes:
- Increased the threshold for entering into a streamlined installment agreement to $50,000 from the current $25,000. This will allow many more taxpayers to qualify for an installment agreement.
- The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60 month maximum.
Note that taxpayers generally must pay an installment agreement fee and the IRS charges interest on any installment arrangement.
In order to qualify for the new expanded streamlined installment agreement, a taxpayer must agree to monthly direct debit payments.
Taxpayers may also pay down their balance due to $50,000 or less to take advantage of this new installment payment option.
Before entering into an installment agreement, taxpayers should explore other options. It may be less expensive to pay your taxes on time with a credit card or a loan. Our office can help you weigh the advantages and disadvantages of an installment agreement.
If you have any questions about the IRS Fresh Start initiative, please contact our office.
Copyright © 2012 - Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.