IRS Fresh Start Program – What it Means for Taxpayers

On May 21 of this year, the Internal Revenue Service expanded its Fresh Start plan.  The plan supplements the Offer in Compromise (OIC) program that makes it possible for some people who owe back taxes, but are in financial distress, to settle their accounts with the IRS.  The Fresh Start initiative makes it possible for many such taxpayers to settle with the IRS sooner than had been the case in the past.  Taxpayers who qualify for the program can expect to pay less—sometimes significantly less—as part of the settlement than they owe in taxes.

The terms of the Fresh Start program figure to provide many significant advantages to delinquent taxpayers, from the likelihood of qualifying for an OIC and the terms of the agreement, to the ability to settle some other liabilitys. (Decreased collection actions due to Fresh Start Tax Program can be seen here)

What Is an Offer in Compromise?

An OIC is a legal agreement between the IRS and a delinquent taxpayer that settles the taxpayer’s account for less than the amount owed.  The IRS typically does not accept an OIC application if it believes that the taxpayer will be able to repay all of his/her tax liability in one payment or via a payment schedule.  Over the past few years, roughly a quarter of OIC applications have been accepted, with an average repayment settling of approximately 14 cents per dollar owed in tax.

What’s New in Fresh Start?

The IRS has publicly acknowledged a huge number of taxpayers in financial distress in announcing Fresh Start, with the expectation that many more OIC applications will be submitted this year and a higher percentage of them will be accepted.  Many estimates of the acceptance rate are in the neighborhood of 40%—much higher than in the past.
Among the new points to OIC as a result of the Fresh Start program are:

• A change in the way the IRS calculates an estimate of future earnings by taxpayers.  The previous method had used estimates ranging from four to five years.  The new standard is only one to two years.
• The allowances for living expenses will be increased, to the benefit of taxpayers.
• Taxpayers will be allowed to repay student loans.
• Taxpayers will be allowed to pay delinquent taxes to states and local jurisdictions.
• Many taxpayers can expect to be able to fully settle their tax problems in as little as two years, compared with the four- to five-year period that had previously been commonplace.

The Bottom Line for Taxpayers

Essentially all of the changes that are being implemented as part of the IRS’s Fresh Start Initiative work to the benefit of taxpayers.  Taxpayers are more likely to have their OIC applications accepted than ever before; living expenses are being more generously calculated than in the past, which should lead to better repayment terms.  Taxpayers will be allowed to clear up a number of other, credit-shattering liabilitys and the process can be expected to be completed in half the time—or less—as in previous years.  Financially distressed taxpayers are encouraged to look into the new program as soon as possible.