Over the last few years, the IRS has made numerous efforts to assist individuals and small businesses that are struggling to meet their tax obligations. The IRS intends to provide taxpayers with a “Fresh Start,” as these initiatives have come to be known. The Fresh Start Program is in the “best interest of both taxpayers and the tax system,” reports IRS Commissioner Doug Shulman. The IRS has issued new guidance for lien filings, lien withdrawals, more flexible installment agreements and an expanded offer in compromise program.
Nina Olson, National Taxpayer Advocate, believes that the program has produced real results. In a recent report to Congress she explained that “components of the ‘Fresh Start’ initiative have produced significant changes in IRS collection actions, which in turn have had positive, meaningful results for many taxpayers.”
Major changes were made by the IRS to its lien filing practice. A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an upaid tax debt. A lien informs the public that the U.S. government has a claim against all property, and any rights to the property, of a taxpayer. This includes property owned at the time the notice of lien is filed and any property acquired thereafter.
A lien will negatively affect a taxpayer’s credit rating. Therefore, the IRS made a decision to reduce the negative impact on taxpayer’s credit by adjusting the level at which the government generally files liens.
Another aspect of the Fresh Start program is a modification of the lien withdrawal guidelines. The IRS realizes that there are significant effects on taxpayer credit when a taxpayer is under an IRS lien. Lending in these circumstances is either extremely difficult or impossible. The effect of the lien on lending was even more detrimental as lending standards tightened during the economic downturn.
Liens will now be withdrawn upon payment in full of the taxes if the taxpayer requests the withdrawal. The IRS has also internally authorized additional personnel to withdraw liens for taxpayers.
If a taxpayer still owes the government delinquent taxes, it may still be possible to obtain a lien withdrawal. If an individual or small business owes the IRS $25,000 or less in unpaid assessments, the IRS will allow the taxpayer to obtain a lien withdrawal if the taxpayer enters into a Direct Debit Installment Agreement (DDIA). A DDIA is essentially an installment agreement where the IRS is authorized to make automatic debits from a taxpayer’s bank account, rather than waiting for the taxpayer to initiate submission of the payment on their own – for example, mailing a check to the IRS.
Likewise, the IRS will withdraw a lien if the taxpayer is already on an installment agreement and authorizes the government to convert their agreement to a DDIA. Some taxpayers already have a DDIA. In this case, they need to merely ask the IRS to withdraw the lien. The withdrawal will occur if the taxpayer meets the criteria above.
Once the DDIA is established, the IRS verifies that the payments will actually be made through the DDIA, then it withdraws the lien. The IRS will not withdraw the lien at the time the DDIA is established – there is a probationary delay.
At the time the IRS established the guidance above, they also expanded some of their criteria for streamlined installment agreements for businesses. Historically, it was only possible to obtain a streamlined payment agreement for a business that owed less than $10,000. This type of agreement generally avoids full financial disclosure to the government and the involvement of a field officer. Now if the business is willing to establish a DDIA they will qualify for a streamlined agreement if they owe up to $25,000. If a business owner owes more than $25,000 in assessed, they could pay their balance down with a lump sum payment to qualify.
More recent guidance has benefited individual taxpayers. In the past, a taxpayer could establish a payment agreement over a 5 year period and avoid full financial disclosure if the taxpayer owed less than $25,000. This cap has now been increased to $50,000 and payments are allowed over a 6 year period. Not unlike the old agreements, the payment timeframe is shortened if the IRS collection statute is less than 6 years. Additionally, in order to qualify for the above, the taxpayer must enroll in a Direct Debit Installment Agreement. These changes will save the taxpayer a significant amount of money and time.
Finally, the Fresh Start program expanded the Offer in Compromise program. The IRS has historically had a streamlined Offer in Compromise program available to taxpayers with lower incomes and debts below $25,000. The IRS expanded the income cap on this to taxpayers with up to $100,000 in income and IRS debts of up to $50,000.
More recently, the IRS adjusted the analysis of Offers in Compromise in favor of taxpayers. They have provided greater flexibility in determining equity in assets. There is also greater flexibility in determining allowable living expenses and a reduction in the amount of future income that must be included for an acceptable offer.
As the National Taxpayer Advocate explained, these changes by the IRS are significantly affecting how taxpayers are subjected to IRS collection efforts. If you are interested in learning whether or not any of theseprograms could help you, we welcome you to contact our office.