What is the IRS “Fresh Start” Program?

In February, 2011, the IRS announced a new program to help struggling taxpayers get a fresh start with their tax liabilities.  The goals of the program are to make it easier for taxpayers to pay back taxes by changing the policies on the filing of liens, make it easier for small businesses to enter into an installment agreement and expand the offer in compromise program.

The IRS files liens as claims against your real and personal property in order to secure the payment of taxes you owe.   The filing of the Notice of Federal Tax Lien serves as a public notice to other creditors that the IRS has a claim against your property.  Not only do these liens appear on title to your real property, they also appear on your credit record and can affect your ability to borrow money.   Even after the tax liability is paid off and the IRS releases the lien, the lien release will stay on your credit record for up to seven years unless the IRS agrees to actually withdraw the lien.

Under the Fresh Start program, the IRS has made several changes to the filing of liens in order to try to lessen the negative impact of a lien on a taxpayer:

1. Significantly increased the dollar threshold when liens are filed.
The IRS has increased the lien filing threshold from $5,000 to $10,000.  However, if a taxpayer owes less than $25,000 and sets up an installment agreement that will pay off the liability within 60 months, the IRS will often agree not to file a lien.  If the taxpayer defaults on the installment agreement, the IRS will then file a lien.

2. Made it easier for taxpayers to obtain lien withdrawals.
Generally, the IRS will release a lien when your tax liability has been paid in full, you have filed all personal, business and information tax returns for the past three years and you are current with your estimated tax payments and payroll tax deposits (if applicable).  Under the Fresh Start program, after the IRS has released the lien, you can now request a withdrawal of the filed Notice of Federal Tax Lien.  Thus, the lien will no longer appear on your credit record.  In order to request the withdrawal, you must complete IRS Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.  As the reason for withdrawal, you should check off box 8d, “The taxpayer…believes withdrawal is in the best interest of the taxpayer and the government.”

3. The IRS will allow lien withdrawals under certain circumstances, when taxpayers who owe $25,000 or less enter into a direct debit installment agreement to pay back the taxes.
The IRS may agree to withdraw the filed Notice of Federal Tax Lien if you enter into a Direct Debit Installment Agreement and are (1) a qualifying taxpayer and (2) meet certain other eligibility requirements.

In order to be a “qualifying taxpayer”, you must be:

  • an individual filing a Form 1040
  • a business with income tax liability
  • an entity with any type of tax debt

The eligibility requirements are:

  •  Your tax liability must be $25,000 or less.  You can meet this requirement by paying down your tax liability to $25,000 before requesting the lien withdrawal.
  • Your Direct Debit Installment Agreement must pay off the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier.
  • You must have filed all applicable tax returns and paid all applicable current taxes.
  • You must have made three consecutive direct debit payments on your installment agreement.
  • You cannot have defaulted on your current, or any previous, direct debit installment agreement with the IRS.
  • You cannot have previously received a withdrawal of a tax lien for the same taxes, unless the withdrawal was for an improperly filed lien.

If you are on a regular installment agreement, you may convert it to a direct debit installment agreement by contacting the IRS or using the IRS’s online services.

When completing IRS Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien, check of Box 8b as the reason for requesting the withdrawal.  That is, “the taxpayer entered into an installment agreement to satisfy the liability on the lien, and the agreement did not provide for a lien to be filed.”

Be warned that, if you default on the direct debit installment agreement after the lien is withdrawn, the IRS may file another lien and pursue collection action against you for the liability.

Under the Fresh Start program, the IRS is also making it easier for struggling small businesses, with employees, to enter into installment agreements (known as the In-Business Trust Fund Express Installment Agreement.)   Generally, the IRS requires financial information and financial supporting documents from a small business to determine the amount the business must pay on an installment agreement.   Under the Fresh Start program, the IRS will generally not require this financial information as long as the business meets the following criteria:

  • The amount of taxes owed is 25,000 or less (or the business can pay down its liability to $25,000).
  • The tax liability must be paid within 24 months or before the expiration of the Collection Statute, whichever is earlier.
  • The business must enroll in a Direct Debit Installment Agreement if the amount owed is between $10,000 and $25,000.
  • The business must have filed all applicable tax returns and be current on all applicable tax payments.

The Fresh Start program also expands the Offer in Compromise (OIC) program to cover more taxpayers.

In order to qualify for an OIC, a taxpayer must generally prove financial hardship both with regard to (1) insufficient equity in his or her assets and (2) insufficient future income to pay off his or her tax liability within the time left on the Collection Statute.  It normally takes the IRS months to process an OIC and the IRS may require a taxpayer to produce substantial additional documentation to prove financial hardship.

Under the Fresh Start program, the IRS is attempting to “streamline” the OIC program by:

  • Making fewer requests for additional information
  • Making the requests by telephone instead of by mail
  • Allowing greater flexibility in determining a taxpayer’s ability to pay

The IRS will consider OICs from (1) wage earners, (2) the unemployed and from (3) self-employed individuals with no employees and gross receipts under $500,000.

Under the Fresh Start program, the “eligibility” requirements for submitting an OIC are:

  • Total household income is $100,000 or less and
  • The taxpayer owes less than $50,000 when he or she files the OIC.

For updates and further information on the Fresh Start program, check the IRS website at www.irs.gov.