In an effort to assist the millions of Americans that have been unemployed during the economic downtown, last year the IRS announced its Fresh Start Initiative. The program provides waived penalties, payment extensions and updated payment guidelines. What is this initiative and who benefits?
Provisions Under Fresh Start
The program provides relief to taxpayers through three main provisions.
- Payment Extensions: Currently, taxpayers who fail to pay their tax balance in full by the April deadline are responsible for penalties and interest on the unpaid balance. Fresh Start allows for a six-month payment extension, waiving all penalties if the balance is paid by a mid-October deadline. Taxpayers are still responsible for the accrued interest, however.
- Increased Caps: The IRS performs a financial analysis of a person’s income and expenses once their tax balance reaches $25,000, determining how much a person must pay on a monthly basis. Additionally, the IRS usually files a Notice of Federal Tax Lien. The Fresh Start Initiative moves the tax balance requirement for this process to $50,000. Thus, more Americans can avoid going through the financial analysis and having Federal Liens against them. The IRS does require the balance to be paid within six years, and the taxpayer must agree to have payments deducted electronically from their bank account.
- Revised Compromise Guidelines. Fresh Start expands the IRS Offer in Compromise program, a process that allows taxpayers to settle their tax balance for less than the actual amount owed. Previously, the IRS calculated a person’s ability to pay based on their projected income over the next four or five years. However, Fresh Start changes that to only one year if the offer is to be paid in less than five months and two years if the balance is to be paid in six to 24 months.
To qualify for the Fresh Start Initiative, individuals must have been unemployed for 30 consecutive days during the prior tax year or before the tax filing deadline in April. If a person files jointly with their spouse, only one person needs to meet the requirement. Self-employed taxpayers are required to prove at least a 25 percent decrease in their net business income. Fresh Start does not apply to couples earning more than $200,000 per year or individuals making more than $100,000 annually. Lastly, persons are not eligible for the program if their tax balance was more than $50,000 at the end of the tax year.
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