IRS Fresh Start Program Offers Penalty Relief and Eases Installment Payment Eligibility Rules

New late filing grace period for 2011 taxes and more relaxed rules for installment agreements under the IRS Fresh Start Program.

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The Fresh Start program was started by the IRS in 2011 to help taxpayers struggling to keep up with paying their taxes in a bad economy. The original program aimed to help taxpayers by easing policies related to tax liens, installment agreements, and Offers in Compromise. The IRS recently expanded the program by adding new tax penalty relief provisions for the unemployed and underemployed and easing eligibility requirements for entering into installment agreements.  

New Penalty Relief Grace Period

Under the expanded provisions of Fresh Start, eligible taxpayers will be granted a six month grace period on failure-to-pay penalties that would otherwise start to accrue after the April 17, 2012 filing deadline.  Normally, taxpayers are assessed a .5% penalty on unpaid taxes each month, with a cap at 25% of the taxpayer’s total tax liability.  Under the new Fresh Start provisions, taxpayers will be granted a six month reprieve from this penalty, allowing them more time (until October 15th) to pay their taxes without accruing additional penalties. 

In order to be eligible for the new penalty relief, a taxpayer must be either:

  • a wage earner who was unemployed at least 30 consecutive days during 2011 or 2012 up to the April 17th filing deadline, or
  • a self-employed individual who experienced a 25 percent or greater reduction in business income in 2011 due to the economy. 

In addition, the taxpayer’s income must not exceed $200,000 for married couples filing jointly or $100,000 for single tax filers.  Taxpayers who owe more than $50,000 to the IRS for calendar year 2011 are not eligible for failure-to-pay penalty relief. 

Anyone who meets the eligibility requirements and wants to apply for relief must file new IRS Form 1127-A. The form asks for your 2011 adjusted gross income and tax liability and the reasons you are requesting relief. It is available on the IRS website at www.irs.gov.

Taxpayers who are granted this relief will have until October 15, 2012 to pay their 2011 taxes. At that time, they must pay in full any taxes, interest, and other penalties owed to the IRS. No additional penalty will be charged for late payment during the grace period, but any other penalties must be paid at that time. In addition, interest continues to accrue at a rate of 3% on all unpaid taxes during the grace period. So, taxpayers who take advantage of the six month grace period must also pay all interest due for 2011, including interest that accrues during the six month grace period.

Finally, taxpayers must still file their tax returns on time, meaning April 17th.  Fresh Start only grants a temporary reprieve from failure-to-pay penalties, not from failure-to-file penalties.

Installment Agreement Eligibility

Taxpayers having trouble meeting their tax obligations can seek to enter into an installment agreement with the IRS. Under these arrangements, taxpayers who owe taxes are allowed to stretch their payments over time instead of having to pay the IRS a lump sum. Under the new Fresh Start provisions, anyone wishing to enter into an installment agreement with the IRS will have an easier time doing so because the threshold for qualifying without having to provide a financial statement was increased from $25,000 to $50,000. In addition, the timeline for paying taxes owed under an installment agreement was increased to 72 months from 60 months.  

For more information on the IRS Fresh Start Program, see the IRS website at www.irs.gov.

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