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August 2012
SURVIVAL TRAINING: Bob Needs More Time…Using an IRS Fresh Start Initiative
By Steve C. Horowitz and Jonathan A. Espinola

Fresh Start Installment Agreement

     An installment agreement provides taxpayers who are unable to pay their entire tax liability immediately the ability to pay a set monthly payment (equal amounts), as determined by the IRS under their guidelines, over a period of time. However, penalties (rate reduced) and interest continue to accrue on the outstanding tax liability and, therefore, the taxpayer will end up paying more than the original tax liability owed.

     Generally, an installment agreement will suspend enforcement collection actions such as levy/garnishment while the IRS considers an installment agreement, for 30 days after the rejection of an installment agreement request, during the time period the IRS considers an appeal of a rejected or terminated agreement, or while an agreement is in effect and the taxpayer is in compliance.

     Note that the collection statute (10 years from the date of assessment) is suspended upon the submittal of the installment agreement, 30 days after the rejection of the installment agreement, and during the time period the IRS considers an appeal of the rejection of the installment agreement.

     The IRS doubled the threshold amount from $25,000 to $50,000 for qualifying under a streamlined installment agreement without providing the IRS with financial information, i.e. Form 433-A, Collection Information Statement. Additionally, the IRS increased the maximum payment term for such streamlined installment agreements to 72 months, up from 60 months.

 

For balances of $25,000 or less, the following criteria must be met:

•The tax liability (taxes, penalties and interest) must be paid in full within 72 months or prior to the expiration of the collection statute (10 years from date of assessment), whichever is earlier

•Taxpayer must be in compliance with all tax return filings and payment requirements

•The installment agreement can apply to any type of tax (i.e. Form 1040- Individual Income Tax, Form 941-Trust Fund (employment taxes), etc.)

 

For balances between $25,001and $50,000, the following criteria must be met:

•The tax liability (taxes, penalties and interest) must be paid in full within 72 months or prior to the expiration of the collection statute (10 years from date of assessment), whichever is earlier

•Taxpayer must be in compliance with all tax return filings and payment requirements

•If an individual, the installment agreement can apply to any type of tax (i.e. Form 1040- Individual Income Tax, Form 941-Trust Fund (employment taxes), etc.)

•The streamlined installment agreement is also available to defunct sole proprietors who owe any type of employment tax

•Payment must be made by Direct Debit drafting of taxpayer’s bank account

•A limited amount of financial information may be required for application

 

Fresh Start Offer in Compromise

     An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities, including penalties and interest, for less than the amount owed. An OIC is generally not accepted if the IRS believes the liability can be fully paid as a lump sum or through an installment payment agreement. However, the IRS is likely to approve the OIC if they believe it is the most they can collect within a reasonable period of time.

     In determining the taxpayer’s reasonable collection potential, the IRS will analyze, based on Form 656 (OIC) and as applicable Form 433-A (Individual) or Form 433-B (Business), the taxpayer’s equity in assets and income less allowable expenses. While the offer is being evaluated, the IRS will suspend all other enforcement collection efforts.

     If the taxpayer is applying for a lump sum offer, the taxpayer must submit 20 percent of the offer with the application. If the taxpayer is applying for a short-term offer (spread over 24 months), only the first payment must be submitted with the application. A filing fee of $150 is required for both lump sum and short-term offers. A taxpayer is not required to make any payments on existing installment agreements during the evaluation phase. Additionally, the collection statute (10 years from date of assessment) is suspended during the IRS’s evaluation of an OIC.

     The IRS has created more flexible guidelines in determining the taxpayer’s collection potential. For lump sum offers that can be spread out over five or fewer months, the IRS will now analyze 12 months of future income, whereas previously the IRS analyzed 48 months of future income. For short-term offers (non-lump sum) to be paid over six to 24 months, the IRS will now analyze only 24 months of future income rather than 60 months of future income.

     The above discussed IRS collection policies offer a window of opportunity for the taxpayer to resolve collection tax problems during these difficult economic times.

 

 

 

 

Steve C. Horowitz, J.D., and Jonathan A. Espinola are J.D., are with Wishart, Norris, Henninger & Pittman, P.A.
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