IRS’ Fresh Start Initiative Now Includes New Penalty Relief and Expanded Installment Agreements

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Jeffrey Galante, founder of JG Tax Group comments on the IRS’ expanded “Fresh Start” Initiative.

JG Tax Group
Contrary to conventional wisdom, the IRS does appear to have a heart.

“Contrary to conventional wisdom, the IRS does appear to have a heart”, says Jeffrey Galante, founder of JG Tax Group.

Answering the cries for help from taxpayers struggling during these difficult financial times, on March 7, 2012, the Internal Revenue Service announced a major expansion of its “Fresh Start” Initiative to help struggling taxpayers with new penalty relief for the unemployed, and making Installment Agreements available to more people.

Under the new Fresh Start provisions, taxpayers, who have been unemployed for 30 days or longer, will be able to avoid the failure-to-pay penalties. In addition, the IRS is doubling the dollar eligibility amount for Installment Agreements to help more people qualify for the program.

The IRS Commission, Doug Shulman, recently said that the IRS has an obligation to work with taxpayers who are struggling to make ends meet.

The IRS announced plans for new penalty relief for the unemployed for the failure-to-pay penalties, which are one of the biggest problems financially distressed taxpayers face when they file their tax returns. Many people don’t file their tax returns because they can’t afford to pay their tax debt. “This just compounds their problems, and causes them to be liable for both the failure-to-file and failure-to-pay penalties,” says Galante.

According to the IRS, to assist those most in need, a six-month grace period for the failure-to-pay penalty will be made available to certain wage earners, and self-employed individuals. 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 Oct. 15, 2012.

The penalty relief will be available to two categories of taxpayers:

  •     Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17, 2012, deadline for filing a federal tax return.
  •     Self-employed individuals who experienced a 25 percent or more reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000, if he or she files a married filing joint tax return, or not exceed $100,000 if he or she files as single or head of household tax return. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers who meet guidelines will need to complete a new Form 1127A to
request the 2011 penalty relief. The new Form 1127A is due by April 17, 2012 to get the penalty relief.

The failure-to-pay penalty is generally half of 1 percent per month reaching a maximum of 25 percent. Under this new relief, taxpayers can avoid that penalty beginning until Oct. 15, 2012. However, the IRS is still legally required to charge interest on unpaid back taxes, and does not have the authority to waive this charge. Currently the interest rate is an annual 3 percent.

The IRS strongly urges taxpayers to file their tax returns by the April 17, 2012 deadline or file for an extension to file. The failure-to-file penalty is applied to unpaid taxes remains in effect and are generally 5 percent per month, with a 25 percent limit, as well.

The expanded “Fresh Start” Initiative also means that more taxpayers will have the ability to enter into streamlined installment agreements with the IRS to pay their tax debts over time.

As a result of the expanded “Fresh Start” Initiative, the threshold for applying for an installment agreement, without having to provide the IRS with a financial statement and accompanying documents, has been raised from $25,000 to $50,000.

Taxpayers who now owe up to $50,000 in back taxes will now be able to enter into a streamlined agreement with the IRS that stretches the monthly payments out over a period of years. The maximum term for streamlined installment agreements has been extended to 72 months from the current 60 month maximum.

Taxpayers needing installment agreements for taxes exceeding $50,000 can pay down their balance due to $50,000 or less and take advantage of this new payment option.

Galante cautions that “although an installment agreement allows taxpayers to pay their tax debt over time on a monthly basis, interest continues to accrue on the outstanding tax debt. Also, the IRS wants taxpayers to agree to monthly direct debit payments in order to qualify for this new expanded streamlined installment agreement initiatve.”

Galante further notes that “the IRS’ goal it to help people get back on their feet financially, and assist taxpayers in meeting their continuing tax responsibilities. Generally the question the IRS first asks when trying to collect on an outstanding tax liability is whether or not the taxpayer is in compliance with both their tax filing and tax paying responsibilities,” says Galante.

When the IRS first announced the “Fresh Start” initiative, the IRS expanded a new streamlined Offer in Compromise (OIC) program to cover a larger number of taxpayers who were struggling financially. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed.

The IRS has said that it recognizes that many taxpayers are still struggling to pay their monthly bills, so the IRS established more common sense changes to the OIC Program to more closely reflect real-world situations. For example, the IRS has said that they will be more flexibility during their financial analysis, which the IRS performs to determine the reasonable collection potential for distressed taxpayers. Before an OIC will be considered for acceptance, the IRS first determines a taxpayer’s monthly income and their equity in assets to ascertain the taxpayer’s ability to pay the tax debt in one lump sum or by monthly installment payments.

In responding to OIC portion of the “Fresh Start” Initiative, Galante says that “the OIC Program is something that struggling individuals might seriously consider to settle their IRS tax debt. Over the past several years, we’ve seen an increase in the number of OIC’s that have been approved by the IRS.” Galante cautions however, that “even though the IRS is promoting the OIC program and is even sending the OIC package of forms directly to taxpayers, the IRS won’t routinely settle an outstanding tax debt for “pennies on the dollar” or some higher dollar amount, unless the taxpayer’s financials justify the settlement.”

JG Tax Group's mission is to provide individuals and businesses with affordable representation for resolving their IRS tax problems. Their staff of attorney, CPA and Enrolled Agent tax relief professionals has successfully resolved thousands of cases and is committed to treating their clients as though they were a member of their own family. For more information or to receive a no cost tax relief consultation, call 1-866-IRS-LAW1 or visit http://www.JGTaxgroup.com.

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