Even the most responsible business owner can fall behind with taxes. Every year, unforeseen delays, expenses, and other financial hardships keep people from paying their taxes to the IRS on time.
However, no matter how you incurred your tax debt, it's important to act now. While the IRS is unlikely to take a "forgive and forget" approach to your tax debt, it does offer several ways to help you pay off and possibly eliminate your outstanding balance. The Fresh Start Program covers many of these options.
What is the IRS Fresh Start program?
The Fresh Start initiative, launched by the IRS in 2011, is an umbrella term for a group of programs that is available to individual taxpayers and small businesses that owe Uncle Sam money. The IRS launched Fresh Start following the Great Recession of 2008 to help save struggling taxpayers.
The Fresh Start program offers different options that allow small business owners to offset their tax obligations, including an offer in compromise, penalty abatement, installment agreements, or the Currently Not Collectible Status. These exemption programs allow eligible taxpayers to reduce their debt, repay it in installments, eliminate fines or stop all collection procedures.
In the Fresh Start program, taxpayers benefit because they can repay their debts, thus avoiding more serious consequences, such as levies, tax liens, or even jail time. The Fresh Start Program also makes the IRS happy because it allows them to collect something from the taxpayer instead of nothing.
How to apply for a Fresh Start program?
Given the variety of support options available under the Fresh Start initiative, the eligibility and application processes also vary widely. However, to be eligible for a Fresh Start program, the IRS requires that you be fully aware of all tax returns.
In addition to catching up, you can make the Fresh Start registration process easy by:
Collect any other documentation necessary for your cases, such as court and hospital records of tax deduction claims.
Complete all of the company's financial records for each fiscal year that the form will cover.
Contact a tax attorney, registered agent, accountant, or tax settlement firm to discuss legal options for reducing tax debt. Many of these professionals offer free advice on these topics.
Obtain and complete the appropriate forms from the IRS website.
How do I know which of the Fresh Start programs is right for me?
Dealing with the Internal Revenue Service can be a confusing and stressful experience, especially when seeking help with tax refunds, and navigating the options available in Fresh Start can be overwhelming. In fact, the IRS rejects many tax exemption requests because of incomplete or inaccurate information.
Therefore, working with a tax professional, such as a tax attorney, registered agent, accountant, or tax resolution firm, to determine which program is right for your situation is always a good idea.
If you would like to begin your research before contacting a professional, please read on for a more detailed review of OIC (offer in compromise), penalty abatement, installment payment, and currently not collectible status.
OIC (Offer in Compromise)
The IRS recognizes that small business owners may have legitimate reasons for not being able to repay their taxes or even request an extension. An offer in compromise (OIC) is an agreement between you and the IRS that reduces the amount of taxes you owe.
The IRS can approve the OIC deal if your initial debt balance is considered negative because your debt exceeds your assets and income. However, that doesn't mean that you can negotiate any amount with the IRS to pay your tax. Instead, the IRS comes with a reduced amount of tax obligations with a reasonable collection potential (RCP). This is the final figure that the IRS estimates they can collect in full.
The IRS recently made these changes to make it easier for taxpayers to qualify for the offer in compromise program:
Allows taxpayers to pay student loans and state and local taxes in the event of non-payment.
Revision of the calculation of future income for taxpayers to take into account only one year of future income for offers due within five months or less and two years of future income for offers with a maturity of six to 24 months.
The Allowable Living Expenses have been increased and include expenses that the Revenue Agency deems necessary for the health and well-being of the taxpayer.
The IRS offers two ways to pay off your tax debt with an offer in compromise.
Lump-Sum: This amount is paid within five months and must include 20% of the bid amount with the request.
Payment Schedule: The IRS sets a 24-month payment schedule. The first payment must be made with the registration fee.
To be eligible for the offer in compromise, you must be aware of all corporate tax forms submitted. A history of bankruptcy proceedings automatically disqualifies a taxpayer from eligibility.
Installment Agreement
If you are not eligible for the Offer-In-Compromise, the IRS offers installment arrangements as an alternative. Payment in installments allows you to pay off your tax debt with a lower monthly fee.
If you owe less than $50,000, you can apply for a Simplified Installment Agreement or SLIA. Under this contract, you pay the entire balance owing, including penalties and additional interest, within 72 months. SLIA requires you to pay taxes directly from your bank account.
The Streamlined Installment Agreement cannot be used if your business owes more than $50,000 in back taxes. However, the IRS offers other types of interest rate agreements that can resolve your specific debt situation, and you can apply for SLIA if you can pay off your balance up to $50,000.
If you owe less than $25,000, you can apply for a long-term installment agreement online. This requires you to create an IRS account online, verify your identity, and provide IRS information about your business.
If you are finding it difficult to apply online, you can complete and submit the required forms to the IRS or send the application over the phone.
Penalty Abatement
The IRS automatically adds penalties to your unpaid debt when you don't file, pay on time, or file the required taxes. These penalties add up quickly and increase your total tax liability if you don't take action.
The good news is that reducing (or remitting) the fine is another possible option to reduce the total tax burden. No fines are imposed under this program, but interest continues to accrue on the balance of unpaid taxes.
However, claiming a penalty abatement is not an easy process. BASED ON VERY STRICT REQUIREMENTS, the IRS asks you to show a reasonable cause to remove the penalties. "Reasonable causes" can include acts of God, fire, missing documents, death, or serious illness or injury that directly affects you or a member of your family.
The IRS requires documents proving reasonable cause, as well as the penalty abatement letter. Your word alone is not enough; Legal and hospital documents may be required to justify the removal of sanctions.
In order to benefit from a penalty abatement for the first time, the following criteria must be met:
Complete filing of previous tax returns.
You have already paid a fee or have an agreement for an installment agreement.
You have not been subject to tax penalties during the three years preceding the request.
If you receive a notice from the IRS, the first step is to contact them by phone to see if the penalty is valid. If so, you can learn more about how to get relief on reasonable grounds.
Currently Not Collectible
Currently Not Collectible (CNC) is the means used by the IRS to slow down the collection process. According to the CNC, the IRS freezes wage garnishment, collection actions, and any deferred payment of debts.
The IRS determines whether your case qualifies for currently not collectible status by comparing the total income and positive investments to standard local and national expenses. These expenses include daily necessities, medical care, accommodation, and transportation costs. If the IRS determines that paying the tax debt after these expenses puts you at risk of serious financial hardship, it will consider the account uncollectible.
Your account can remain in CNC status indefinitely until your financial situation changes. The Internal Revenue Service will periodically review your account to see if you can start making partial or full payments as your financial situation improves.
If your earned income does not improve after the 10-year IRS statute of limitations expires, the IRS cancels your tax liability. If your financial situation is long-term or even permanent, CNC is the best option for tax cuts.
To demonstrate the CNC's financial hardship, complete IRS Form 433-B to document your business's collection information. You will need to include detailed information about all of your assets and their market values, as well as the amount of income you have earned and spent in the past three months.
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