Even the most conscientious small company owner can fall behind on their tax obligations. Every year, many are unable to pay the Internal Revenue Service on schedule due to unanticipated delays, fees, and other financial difficulties.
But, regardless of how you got behind on your taxes, you need to act quickly. While the IRS does not “forgive and forget” about your tax obligation, it does provide many options to assist you to shrink and eventually remove the remaining sum. The Fresh Start program incorporates several of these options.
What is the IRS Fresh Start Program?
The IRS’s Fresh Start initiative, launched in 2011, is an umbrella phrase for a collection of services accessible to individual taxpayers and small businesses that owe money to Uncle Sam. Following the Great Recession of 2008, the IRS established Fresh Start to assist struggling taxpayers in getting back on their feet.
The Fresh Start program provides small company owners with many choices for resolving their tax issues, including an Offer in Compromise, payment agreements, penalty abatement, and Currently Not Collectible status. These programs enable qualifying taxpayers to decrease their debt, pay it in installments, avoid penalties, or halt all collection efforts.
Taxpayers benefit from the Fresh Start program because it allows individuals to pay off their debt while avoiding more significant repercussions such as tax liens, levies, or jail time. The IRS is also pleased since Fresh Start permits them to collect something rather than nothing.
What’s the application process for the Fresh Start Program?
To be eligible for the Fresh Start program, you must be up to date on all tax forms.
Aside from catching up on your studies, there are a few things you can do to make the Fresh Start application process go more smoothly:
- Speak with a tax lawyer, enrolled agent, CPA, or tax resolution agency about your legal alternatives for tax debt relief. Many of these experts provide free consultations on these topics.
- Gather all financial documents for your firm for each tax year covered by the claim.
- Download and fill out the necessary forms from the IRS website.
- Obtaining any further documents required for your case, such as court and medical records for tax abatement petitions.
If you’ve fallen behind on your bookkeeping, Bench’s Retro team of seasoned professionals can get you caught up fast and help you uncover deductions that can lower your overall tax obligation.
We can also connect you with one of our dependable tax resolution partners, such as 20/20 Tax Resolution. They can assist you in navigating the filing procedure and ensuring that your issues are handled throughout. They will even represent you in front of the IRS.
How can I choose which Fresh Start option is best for me?
Because the Fresh Start program offers so many alternatives, it is always a good idea to consult with a tax expert – such as a tax attorney, enrolled agent, CPA, or tax resolution agency – to determine which program is best for your case.
The IRS dismisses many tax relief petitions merely because the information is inadequate or incorrect.
Compromise Offer
The IRS understands that a small company owner may have valid reasons for being unable to pay back taxes or even request for an extension.
An Offer in Compromise, or OIC, is a contract between you and the IRS that decreases the amount of taxes owed.If your initial debt is declared uncollectible because your liabilities outweigh your assets and income, the IRS may approve the OIC arrangement.
This does not, however, imply that you may bargain with the IRS over any sum to settle your tax due. Instead, the IRS calculates a lower tax debt amount known as the Reasonable Collection Potential, or RCP. This is the total amount the IRS believes it can collect.
To make it easier for taxpayers to qualify for the OIC program, the IRS recently implemented the following changes:
- Revised the taxpayer’s future income calculations to consider just one year of future income for offers due in less than five months and two years of future income for offers payable in six to 24 months.
- Allow taxpayers to repay school loans as well as any outstanding state and local taxes.
- Increased the amount of permissible living costs, which are expenses determined by the IRS to be required for the taxpayer’s health and welfare.
The IRS provides two options for paying your tax burden with an OIC.
- Lump sum: This amount is paid in one lump sum over the course of five months and must include 20% of your offer amount with the application.
- Payment timeline: The IRS will establish a 24-month payment schedule.The initial payment must be accompanied by the application fee (which will be $205 starting in 2023).
There are advantages and disadvantages to employing the OIC as a tax debt repayment method.
Pros:
- Your tax liability will be greatly reduced.
- A negotiated plan provides more acceptable, affordable payments.
- Prevents the IRS from garnishing wages or confiscating other assets; and – Removes any tax liens against your company.
Cons:
- If you are denied an OIC after applying, the IRS may use your information to collect the amount in other ways.
- Applying for an OIC is a time-consuming and complex procedure that necessitates a substantial quantity of financial paperwork. It can take 7-12 months to get authorized, which means missing out on income for months.
- You will not be able to collect any tax credits or other advantages the following year if you file for an OIC. You will also lose any tax refund for the next year. Refunds are allocated to your outstanding tax debt.
- The OIC application procedure is not cheap. You must make an initial payment in addition to the application cost. This is either 20% of the total amount offered to pay or your first monthly installment. This payment is non-refundable even if you are not authorized.
- Certain aspects of your OIC information will be made public.
To be eligible for the OIC, you must keep all business tax papers up to date. You are immediately disqualified if you have a history of bankruptcy proceedings.
Fill out an online pre-qualification form to confirm your eligibility for the OIC. Following confirmation of eligibility, go to the OIC Application Package for all required forms and step-by-step instructions.
Installment Contract
If you do not qualify for the OIC, the IRS provides an alternate method in the form of installment agreements. An installment arrangement allows you to pay off your tax burden in monthly amounts that are more manageable.
You can qualify for a Streamlined Installment Agreement, or SLIA, if your debt is less than $50,000. You must pay the whole balance of the loan, including any extra penalties and interest, within 72 months under this agreement.
The SLIA mandates that you pay your payments by direct debit from your bank account.
If your company owes more than $50,000 in unpaid taxes, you cannot use the SLIA. However, the IRS offers different forms of installment agreements that can solve your individual financial circumstances, and if you can pay your sum down to the $50,000 barrier, you can qualify for the SLIA.
The payment plan has both advantages and disadvantages:
Pros:
- Installment agreements imply a more manageable monthly payback schedule that is flexible.
- An installment arrangement shows the IRS your commitment to settle your debt and is rewarded with less harsh penalties.
- You can pay off your outstanding debt balance at any moment throughout the 72-month period without incurring any additional costs.
Cons:
- Interest and penalties continue to accrue, increasing the original amount of debt.
- Enrollment costs might reach $225.
- The agreement does not prohibit the IRS from imposing a federal tax lien on your company. However, any liens that were in place at the start of the plan will be eliminated after multiple payments.
- If you fail to make a payment, the IRS has the authority to terminate the agreement and punish you.
If you owe less than $25,000, you can apply for a long-term installment plan online. To do so, you must create an online account with the IRS, authenticate your identification, and send information about your business to the IRS.
If you are unable to apply online, you can submit the essential forms to the IRS or apply by phone. The number to dial is 1-800-829-0922.
Penalty Reduction
When you fail to submit a return, pay on time, or deposit any needed taxes, the IRS automatically adds penalties to your outstanding obligation. If you do nothing, these fines soon build up and increase your overall tax obligation.
The good news is that penalty abatement (or relief) is another option for lowering your overall tax burden. Penalty fines are waived under this scheme, but interest continues to accrue on the unpaid tax balance.
However, applying for a tax abatement is not a simple process. The IRS requires you to demonstrate good cause in order to have the fines lifted.
“Reasonable cause” includes natural catastrophes, fire, the difficulty to collect documents, or death, serious sickness, or injury directly affecting you or a member of your immediate family.
Along with the penalty abatement letter, the IRS demands documents to substantiate the reasonable cause. Your word alone won’t be enough; court and medical documents may be required to corroborate the reasons you want the sanctions lifted.
To be eligible for a first-time abatement, you must fulfill the following requirements:
- You had no tax penalties for the three years before your application.
- You paid past taxes or have an installment agreement in place.
- You have always filed your prior taxes on time.
If you receive a notification from the IRS, the first thing you should do is call them at 1-800-829-1040 to confirm whether the penalty is real. If it is, you can learn more about how to obtain relief by meeting their reasonable cause standards.
Not Currently Collectible
CNC, or Currently Not Collectible, is the IRS’s approach of putting a stop to the collection procedure. The IRS suspends wage garnishment, collection activities, and any delayed debt payments under the CNC.
The IRS assesses if your case is CNC eligible by comparing your overall positive income and assets to national and local standard living costs. These expenditures include daily living expenses, health care, housing, and transportation.
If the IRS finds that paying up your tax obligation after these costs will place you in serious financial jeopardy, the account will be considered uncollectible.
As long as your financial situation does not change, your account can stay in CNC status indefinitely. As your financial condition improves, the IRS will evaluate your account to determine whether you can begin making full or partial payments.
If your income does not improve after the IRS’s 10-year collection statute of limitations expires, the IRS will write off the tax obligation. CNC is your greatest choice for tax relief if your financial situation is long-term or perhaps permanent.
Fill out IRS Form 433-B to demonstrate financial hardship for CNC status. This form records the collected information for your company. You must provide complete information on all of your assets as well as their market prices.
You will also be required to supply details on how much money you made and spent in the last three months.
The Fresh Start Program Will Get You Back On Track.
If you get behind on your taxes, it is critical that you follow up with the IRS as soon as possible to address the deficit. The IRS Fresh Start initiative provides several options for reducing your tax load through affordable payment plans.
If you need help getting started, contact our trained team of professionals now.