Since 2008, the IRS has been adjusting its collections practices to help struggling taxpayers during this difficult financial climate.

Part of these efforts is the "Fresh Start" initiative, announced on February 24, 2011. The changes included in this initiative are: (1) Adjustments to Lien Polices (2) Easier Access to Installment Agreements for Struggling Small Businesses and (3) Expanding the Streamlined OIC Program.

Last week, the IRS announced a major expansion of this "Fresh Start" initiative. As part of this expansion, the IRS is taking steps to provide new penalty relief to the unemployed and allowing even more taxpayers to qualify for an installment agreements.

Adjustments to IRS Lien Polices

Under the Fresh Start Initiative, the IRS will no longer file a lien if the tax owed is under $10,000 (unless special circumstances warrant otherwise).

After a lien has been released because the tax liability has been satisfied, a taxpayer may request a withdrawal in writing by submitting form 12277.

Furthermore, a taxpayer who owes $25,000 or less will be eligible for a lien withdrawal if he or she sets up an installment agreement through direct debit and makes three consecutive direct debit payments.

Installment Agreements for Businesses

Small business that owe $25,000 or less in payroll tax, can set up an installment agreement without submitting a financial statement if the installment agreement allows for the debt to be paid within 24-months and the installment agreement is set up through direct debit.

Offer in Compromise

The streamlined OIC program is available to wage earners, the unemployed and self-employed taxpayers with no employees and gross receipts under $500,000. A taxpayer is eligible for this program if his or her total household income is $100,000 or less and the amount owed to the IRS is less than $50,000. If the taxpayer qualifies for this program, fewer requests will be made for additional financial information and there will be greater flexibility in calculating a taxpayer's reasonable collection potential.

Following the initial expansion of the streamlined OIC Program in 2011, the IRS has been working to put in place additional common-sense changes to the program to reflect real-world situations.

Relief From Penalties

The IRS plans to allow a six-month grace period on failure-to-pay penalties for certain wage earners and self-employed individuals. In order to qualify, the taxpayer must fit into one of the following categories:

  • Wage earners who have been unemployed for at least 30 consecutive days during 2011 or in 2012 (from January 1-April 17 2012).
  • Self-employed taxpayers who experience at least a 25% reduction in business income in 2011 as a result of the economy.

Furthermore, the taxpayer's income must be equal to or less than $200,000, if filing married filing joint, or $100,000, if filing single or head of household. The taxpayer's balanced owed for 2011 must also not exceed $50,000. If these eligibility requirements are met, taxpayers need to complete Form 1127A in order to request relief.

If the tax, interest and other penalties are fully paid by October 15, 2012, a request for an extension of time to pay will shield the taxpayers from the failure to pay penalty for 2011.

Interest, which is currently 3% per year, is not affected by this grace period and will continue to accrue on unpaid back taxes.

Installment Agreements

The IRS has also expanded the streamlined installment agreement process to allow individual taxpayers who owe $50,000 or less to request an installment agreement without having to submit a financial statement. The maximum term for payment has also been raised to 72 months. In order to qualify for for this expanded streamlined installment agreement, taxpayers must agree to pay through direct debit.