If the amount of tax you owe came as a surprise to you, and you haven’t set aside the money you’ll need in order to pay it, the IRS is giving you new options with its Fresh Start Program.
The Journal of Accountancy has published an article that outlines the elements of the IRS’s Fresh Start initiative, which makes it easier for taxpayers to qualify for alternative payment programs. Here’s a summary.
In order to qualify for an installment agreement, a taxpayer has to meet the following requirements:
- The taxpayer must have filed all required tax returns.
- The taxpayer must be up-to-date with current-year tax obligations.
$50,000 or Less Owed
If a taxpayer owes income tax of $50,000 or less on Form 1040, he or she can request an installment agreement without submitting the financial information normally required on Form 433-F, Collection Information Statement.
Taxpayers who owe between $25,000 and $50,000 should file Form 9465-FS, and taxpayers who owe $25,000 or less should use Form 9465, Installment Agreement Request.
If the taxpayer owes $10,000 or less, the IRS is required to grant the request if the taxpayer meets the requirements, according to Form 9465:
- During the past five years, the taxpayer (and spouse if filing jointly) has timely filed all income tax returns and paid all income taxes without entering into an installment agreement.
- The taxpayer must agree to pay the full amount owed within three years and comply with all filing requirements and payment of tax while the agreement is in effect.
Payment in Full
The IRS historically has allowed up to 60 months to pay a tax obligation in full. Under the Fresh Start Program, it is now allowing up to 72 months to pay (IR-2011-20, IR-2012-31, and IR-2012-53).
If a taxpayer owes $50,000 or less, he or she can apply online for an installment agreement by going to the “Online Payment Agreement Application” page on the IRS’s website at tinyurl.com/yggtp9.
More Than $50,000 Owed
If a taxpayer’s tax liability exceeds $50,000, another set of rules applies to establishing an installment agreement, which includes working with Automated Collection System (ACS) personnel at an IRS call site. When the liability exceeds $100,000, the case is referred to the field.
ACS would require the taxpayer to complete Form 433-F or Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. To establish an installment agreement, the taxpayer owing more than $50,000 would call the IRS-ACS at 800-829-3903 or the Practitioner’s Hotline at 866-860-4259 (select option #4) and read the financial information over the telephone to an IRS Collection employee.
If the taxpayer’s financial information fits within the national Collection Financial Standards (discussed below), an agreement can be reached over the phone. If some or all of the categories listed on Form 433-F exceed the national standards, the IRS will require more financial information. (During the time the process is pending, the taxpayer will need to make good-faith voluntary payments, which will increase the likelihood that the IRS will delay collection action until a settlement is reached.)
Partial Payment Installment Agreement
The IRS does offer another payment option called “partial payment installment agreements” when it is not possible for a client to fully pay his or her tax liability before the expiration of the 10-year collection statute of limitation. This type of agreement can be discussed with the IRS if an OIC is not accepted or if a client is not eligible for an OIC.
The IRS uses the Collection Financial Standards to help determine the taxpayer’s ability to pay a delinquent tax liability. (Detailed information on the national standards is available on the “Collection Financial Standards” page of the IRS’s website at tinyurl.com/4mhnc.)
The Collection Financial Standards include amounts for:
- Food and clothing
- Housing and utilities
- Out-of-pocket health care expenses
These are considered “necessary” expenses, but there are other necessary expenses the IRS recognizes, such as health insurance premiums, court-ordered payments, certain taxes, and secured debt (see IRM §18.104.22.168). “Conditional” expenses (expenses that do not meet the definition of necessary expenses) are also allowed if the tax liability (including the interest and failure-to-pay penalties) is paid within five years (IRM §22.214.171.124).
The IRS has guidelines for collection procedures and guidelines of what constitutes necessary and conditional expenses. The “Financial Analysis Handbook” portion of the IRM is available at tinyurl.com/74u6rso.
Liens and Levies
The IRS has historically filed liens for tax liabilities that exceed $25,000. It recently announced that, in an effort to help struggling taxpayers, it was changing its lien practices (IR-2011-20 (2/24/11)). There will be a significant increase in the dollar threshold, which the IRS stated in the news release would be announced in about one year. (Check irs.gov routinely for updates.)
Offers in Compromise
The Fresh Start program also has created a more flexible OIC program (IR-2012-53 (5/21/12)). Some of the changes are:
- Revising the calculation for the taxpayer’s future income
- Allowing taxpayers to repay student loans
- Allowing taxpayers to pay delinquent state and local taxes
- Expanding the Allowable Living Expense allowance category and amount
Other significant changes are in the calculation of the taxpayer’s reasonable collection potential. The IRS now looks at only one year of future income for offers paid in five months or less, down from four years, and two years of future income for offers paid within six to 24 months, down from five years.