Before we get into the IRS Fresh Start Initiative, it’s important to understand how the IRS collections process works.
IRS debt usually arises from one of three situations:
- A tax return is filed showing tax due.
- An adjustment resulting in additional tax due is made by the IRS through an in-person audit, correspondence audit, or by the taxpayer filing an amended return.
- The IRS files a substitute for return showing tax due.
In all of these cases, the IRS must assess the taxpayer’s liability and demand payment. The assessment date is important as that is the date the collections statute begins to run (10 years). Following the assessment, a notice and a follow up notice will be sent to demand payment. If payment is not made, then the collections process begins.
The IRS collections begins with a series of computer generated (CP) notices sent by Automated Collections Services (ACS).
ACS has the authority to place liens on your assets, levy your bank account and other assets, garnish your wages, and enforce a lien against any 3rd party income source.
Some cases may go to a Revenue Officer. This is typically seen with large balances (over $250,000) or trust fund recovery cases. Revenue Officers possess tremendous authority to both settle debt cases and take enforcement action. If you are represented by power of attorney, the revenue officer will contact the representative listed on your power of attorney.
Relief under the IRS Fresh Start Initiative
If you can’t fully pay your tax bill, then you may qualify for one or more options under the IRS Fresh Start Program. However, taxpayers should be aware that this isn’t a magic wand or get out of jail free card. In the vast majority of cases, taxpayers will still pay a large portion of the taxes due.
- Penalty abatement. This usually doesn’t provide much relief for taxpayers. Other than First Time Abatement, all the other penalty abatement categories are difficult to qualify under.
- Installment agreement. If you owe less than $50,000 and are able to pay the balance within 72 months, you qualify for a streamlined agreement. If you owe more than $50,000, you do not qualify for a streamlined agreement, and the IRS will request financial information to determine your ability to pay.
- Tax lien relief. The Fresh Start program has increased the minimum liability for filing a tax lien from $5,000 to $10,000. Additionally, taxpayers are now able to request a “withdrawal” of a tax lien that has been “released.” A withdrawal will remove the lien from your records and assist you in repairing your credit report.
- Offer in compromise. An offer in compromise is a lump-sum payment arrangement with the IRS where the taxpayer would not be able to pay his full tax liability before the expiration of the collections statute. Essentially you agree to pay $X amount in exchange for the IRS wiping out the tax debt. The amount depends on multiple factors, including your future earning capacity, current assets, secured debts, the number of individuals in your household, and other factors. Theoretically, the amount could be as little as $1 if you have no net worth and no future earning potential. Realistically, most taxpayers do not qualify for an offer in compromise, and for those that do, the offer amount is often a significant portion of the debt.
The best approach to resolving large balance IRS debt is a methodical approach that is likely to succeed. You or your tax professional should:
- Review your account transcripts and financial information. It’s essential to determine how much you owe and what you can afford to pay. Although you may have little savings at the end of the month due to living expenses, the IRS has it’s own standard tables of personal living expenses. If your income exceeds these amounts, you have discretionary income, and the IRS expects you to be able to pay that amount per month. We review all options and determine what programs under the Fresh Start Relief you qualify for.
- Review your options under the Fresh Start Program.
- Gather and submit the required information to the IRS.
- Follow up with the IRS as needed until the matter is resolved.
This process takes time and effort, but it is the only way to ensure success in resolving your tax debt. There are no quick fixes to resolving tax debt.
If you have a significant amount of IRS tax debt, reach out to a tax professional.