What Is the Fresh Start Program for Taxes?

The IRS Fresh Start Initiative is not a single program, but rather a set of policy changes introduced in 2011 to assist individuals and small businesses facing tax debt. These changes aim to make it easier for taxpayers to resolve their outstanding tax liabilities and avoid severe collection actions like tax liens. The initiative expanded access to existing tax relief options, providing more flexible terms for payment and penalty resolution.

Determining Eligibility

Qualifying for tax relief under the Fresh Start Initiative depends on several factors, primarily focusing on a taxpayer’s compliance history and current financial situation. A fundamental requirement is that all necessary tax returns must be filed and up-to-date. The IRS will not consider an application for tax relief if there are unfiled returns.

Taxpayers must also demonstrate consistent compliance with tax obligations, including making estimated tax payments or ensuring adequate withholding for the current year. This demonstrates a commitment to ongoing tax responsibilities. The IRS evaluates a taxpayer’s “ability to pay” by assessing their income, living expenses, and assets. This financial analysis helps determine if a taxpayer can reasonably pay their debt in full, through an installment agreement, or a reduced payment through an Offer in Compromise. If a taxpayer can afford basic living expenses after paying their full tax debt, they are considered to have the ability to pay; otherwise, tax debt reduction may be considered.

Understanding Relief Options

One such option is an Offer in Compromise (OIC), which is an agreement where the IRS settles a tax liability for less than the full amount owed. An OIC may be accepted under three main circumstances: doubt as to liability, doubt as to collectibility, or effective tax administration. Doubt as to liability means there is a genuine dispute over whether the tax debt is actually owed, while doubt as to collectibility applies when the taxpayer’s assets and income are less than the full tax liability. Effective tax administration may be a basis if collecting the full amount would cause economic hardship or be unfair due to exceptional circumstances.

Another common relief option is an Installment Agreement (IA), which allows taxpayers to make monthly payments over a set period. Under the Fresh Start Initiative, the streamlined installment agreement threshold was increased, allowing taxpayers owing up to $50,000 in combined tax, penalties, and interest to pay over a period of up to 72 months (six years). This option is available to those who have filed all required returns and can pay off the debt within the specified timeframe. While interest and penalties continue to accrue on the outstanding balance, an IA can prevent more aggressive collection actions.

Penalty Abatement allows for the removal of certain penalties imposed by the IRS. Taxpayers may qualify for abatement due to “reasonable cause,” which applies when circumstances beyond their control prevented them from filing or paying on time, such as serious illness, natural disasters, or the destruction of records. The IRS also offers a “first-time abatement” waiver for certain penalties, provided the taxpayer has a clean compliance history for a specified period and meets other criteria.

Navigating the Application Process

Taxpayers must navigate the application process to formalize their request. Initiating contact with the IRS for tax relief can be done through various methods, including calling the IRS, sending a letter, or submitting specific forms. The choice of method often depends on the type of relief sought and the complexity of the taxpayer’s situation.

Specific forms are required for each relief option. For an Offer in Compromise, taxpayers use Form 656, along with financial statements like Form 433-A for wage earners and self-employed individuals or Form 433-B for businesses. To request an Installment Agreement, Form 9465 is used. For Penalty Abatement, Form 843, Claim for Refund and Request for Abatement, is the appropriate document to submit.

Submitting all required documentation is an important part of the process. This includes providing comprehensive financial statements, income verification, and details of expenses to support the chosen relief option. After submission, the IRS reviews the application, which may involve requests for additional information or clarification. Taxpayers receive a notification of the IRS’s decision. If a request is denied, taxpayers have the right to appeal the decision, providing an opportunity to present further information or argue their case.