Owing your least favorite uncle a back-tax debt is undeniably scary and stressful. Uncle Sam—the most powerful creditor in the world–is typically the last entity that one wants to deal with due to all the collection weapons it has readily at its disposal. It is a direct result of the fear and anxiety that a federal tax liability creates that makes it quite common for a taxpayer to drop their guard and be lulled in by various promises of tax relief strategies that are delivered by way of radio, television, phone, internet or mail.
While some of these messages sound too good to be true, they are also difficult to discredit outright due to the possibility that they may be accurate. The truth is that some taxpayers do, in fact, qualify for jaw-dropping tax settlements or other seemingly too-good-too-be-true forms of tax relief. Just be careful. Disreputable tax relief service providers sometimes lure people in with false promises.
The good news is that there is relief available from straight-shooting tax relief companies who provide high quality services. With a little common sense and some research, it is not all that difficult to figure out who is offering a realistic solution and who is pitching a pie-in-the-sky.
One phrase often used in these advertising campaigns that catches people’s attention is the “IRS Fresh Start Initiative.” What is the Fresh Start Initiative? How can it help? Is it as miraculous as the advertisements claim it to be?
The reality is that the Fresh Start Initiative is not new. In fact, it goes as far back as 2011, but at that time is was referred to as the Fresh Start Program. The initiative/program was initially implemented with the objective of providing taxpayers with a first-time tax liability an opportunity to make things right again by providing expanded options toward securing voluntary resolution. The initiative offered a more streamlined path toward reducing outstanding tax liabilities in a more affordable manner while also reducing the number of federal tax liens filed by the IRS in order to lessen the negative impact on credit scores.
Here is what you need to know about the most important aspects of the Fresh Start Initiative as well as how the “Initiative” might work to your advantage.
Federal Tax Liens
Under the guidelines of the Fresh Start Initiative, the IRS increased the threshold dollar amount that resulted in a federal tax lien being filed on individuals. The amount went from $5,000 to $10,000 to the present amount of $25,000. This change dramatically reduced the number of federal tax liens filed, which in turn reduced the negative impact that an outstanding tax liability had on a taxpayer’s credit score.
Additionally, the initiative both eliminated and streamlined some of the internal bureaucratic rules and regulations, which allowed for the discharge of already filed federal tax liens to be expedited once an outstanding tax debt was paid in full. Moreover, it also simplified the process for discharging already filed federal tax liens on personal income tax liabilities, provided that the outstanding income tax liability was reduced to below $25,000 and provided that the taxpayer had made several reoccurring monthly payments under an established Direct Debit Installment Agreement.
Another objective of the initiative was to promote direct debit payments as the IRS found these types of payments to be more efficient. Directly debited payments were found to reduce the potential of a default of an Installment Agreement as the payments became automatic, thereby reducing human error in accidently forgetting to make the agreed upon payment by the agreed upon due date.
The Fresh Start Initiative, as it is applied to Installment Agreements, has slowly evolved. At first the IRS provided a more streamlined process toward securing resolution of a personal tax liability of $25,000 or less by way of a payment agreement. Of course, certain preconditions were required to qualify, such as being in complete tax compliance with all required payments, and having all required returns filed. Complete tax compliance has always been and, more likely than not, will always continue to be a prerequisite toward securing voluntary resolution.
The IRS then modified the criteria to allow the streamlined resolution process to apply to taxpayers with a personal tax liability of $50,000 or less to be paid within the lessor of 5 years or the number of months necessary for the liability to be satisfied in full by the Collection Statute Expiration Date (or “CSED”), provided that it was the first time the taxpayer fell behind with their taxes.
Not too long after this, the IRS slightly extended the time frame to the lessor of 6 years or the number of months necessary for the liability to be satisfied in full by the CSED, provided that a Direct Debit Installment Agreement was secured.
Most recently, in 2018, the IRS implemented a pilot program that provided a streamlined pathway toward resolving a personal tax liability of $50,000 to $100,000 with an Installment Agreement that paid the liability in the lessor of 7 years or the Collection Statute Expiration date. This pilot program was initially set to expire in September 2018, but fortunately it did not expire at that time. While the pilot program has not yet officially been codified and made permanent, for the time being, it does appear that some IRS collection agents are continuing to follow its guidelines.
The Installment Agreement portion of the Fresh Start Initiative does apply to business liabilities, but it is not as lenient as it is with personal tax liabilities. It provides a streamlined path for businesses toward securing an Installment Agreement provided that the outstanding tax liability is $25,000 or less, and provided that the liability is paid in full within the lessor of 2 years or the Collection Statute Expiration Date.
Offer in Compromise
Similar to Installment Agreements, the Fresh Start Initiative made Offers in Compromise (tax settlements) a viable option to even more taxpayers by modifying the financial analysis standards as it pertains to monthly expenses and equity in assets. An Offer in Compromise is a method of settling an outstanding IRS tax liability for less than the full amount when it can be thoroughly demonstrated that paying the liability in full will create a severe financial hardship to the taxpayer. The IRS will consider approval of a doubt as to collectability (see below) Offer in Compromise when the taxpayer can demonstrate that, after taking into consideration net monthly income (income minus allowable expenses) and realizable equity in assets, that the offered amount is the IRS’s best collection potential.
There are three subcategories for Offers in Compromise with the IRS. These categories are doubt as to liability, doubt as to collectability, and effective tax administration. The vast majority of Offer in Compromises that are submitted to the IRS fall into the doubt as to collectability category as this category encompasses situations where the taxpayer can demonstrate that they do not have the ability to resolve the outstanding tax liability in full through equity in assets or ongoing monthly payments based on net monthly income within the time frame that the IRS has to collect. Consequently, this article will focus on how the Fresh Start Initiative has impacted Offers in Compromise based on doubt as to collectability.
Offer in Compromise Allowable Expenses
The IRS expanded what types of expenses as well as the amounts of the expenses that are considered allowable when determining the taxpayer’s reasonable collection potential. Some of the modifications to allowed expenses include increased living expenses (such as vehicle operating expenses on older or high mileage vehicles), student loans that are being actively paid back, and a portion of state and local tax debts. By expanding allowed expenses, one’s net monthly disposable income decreases, which in turn allows a taxpayer to substantiate a lower monthly ability to pay toward the outstanding tax debt. The result is that some taxpayers who would not have qualified for a settlement before now do, and some who qualified for a settlement before now qualify for a lower settlement.
Offer in Compromise Net Realizable Equity in Assets
As a general rule, the IRS now allows equity in income producing assets owned by businesses to be excluded from the calculation of the taxpayer’s reasonable collection potential. This is a substantial allowance that has greatly expanded the number of businesses that can now qualify for an Offer in Compromise. Businesses with significant equity in assets that might not have qualified at all under the prior guidelines might, under the new guidelines, qualify for a jaw-dropping settlement.
The Fresh Start Initiative also allows for a reduction in the equity calculation for the amount of funds available in an individual’s bank account as well as a reduction in the amount of equity in vehicles used for work, production of income, and/or the welfare of the taxpayer’s family.
Lastly, the IRS has also slightly eased the criteria where the value of a dissipated asset(s) will be factored into the taxpayer’s reasonable collection potential. The IRS considers an asset to be dissipated when it can be shown that the taxpayer sold, transferred, encumbered, or otherwise disposed of assets in an attempt to avoid the payment of the tax liability.
The IRS would typically factor in the equity of dissipated assets into the calculations of a taxpayer’s ability to pay on an Offer in Compromise. However, as part of the Fresh Start Initiative, the IRS now allows for equity in dissipated assets to be excluded in the reasonable collection potential calculations when it can be shown that prior to six months of the tax assessment date, the taxpayer used the assets or proceeds from the sale of the assets for expenses that are necessary for the production of income or for the health and welfare of the taxpayers or their family.
Again, these expanded allowances result in the reduction of net realizable equity in assets that are factored into an Offer in Compromise, thereby greatly increasing the number of candidates that can now qualify for an Offer in Compromise to effectively settle their outstanding tax liability for less than the full amount.
The Fresh Start Initiative has been a lifeline toward securing favorable resolution for many struggling businesses and individuals who have outstanding tax liabilities. Nonetheless, it is important to understand that Offers in Compromise are not a one-size-fit-all solution, and that most taxpayers do not qualify. Beware that there are some disreputable tax relief companies who will promise a screaming deal tax settlement to just about anyone, regardless of whether they qualify. The following are red flags:
- The tax relief service provider claims they can secure a phenomenal tax settlement (Offer in Compromise) on your behalf, and one or more of the following is true:
- Their representative did not ask basic questions about your (or your business’s) income, expenses, and equity in assets prior to recommending an Offer in Compromise;
- You have high income (or your business generates enough profit to be able to repay the entire tax debt over time);
- Your equity in assets significantly exceeds the amount you owe in taxes;
- You have checked out the tax relief service provider with the BBB and have read a decent number of online reviews, and there is evidence that the company is disreputable.
At the other end of the spectrum are a handful of ethical and highly competent tax relief service providers whose expertise can make a world of difference when it comes to resolving your tax liability. An experienced, knowledgeable, and skillful tax resolution professional can help you determine a tax resolution strategy that is realistic, and can implement that strategy in an effective manner, thereby effectuating a result that is far better than that you could have secured on your own.
Fortress Tax Relief employs caring and knowledgeable professionals who would be happy to evaluate your situation and outline a realistic solution for you at no charge. All you have to do is give us a call.
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