When you live abroad, it is easy to fall out of compliance with IRS tax laws. One of the programs to provide relief and moving forward is the IRS Fresh Start Initiative.
Unfortunately, if you failed to pay your taxes on time and/or file the required paperwork, you may find that you owe a substantial amount of back taxes, interest and penalties to the IRS. As time goes on, the balance you owe will only continue to grow. Fortunately, the IRS offers certain programs expat taxpayers can use to pay their debt in full while also reducing the amount of interest and penalties they owe.
What Is the Problem with Tax Debt?
Whether you live inside the United States or abroad, the IRS imposes requirements on all U.S. taxpayers with regard to the filing of tax returns and payment of taxes. If you don’t comply with these requirements, you will face serious consequences. For most taxpayers, failing to file or pay taxes on time leads to penalties and interest. As time goes on, the amount you owe in penalties and interest will only continue to increase. In addition, the IRS can use harsh tactics to collect the debt, including wage garnishment, tax liens, bank account seizures and more. For this reason, it is not wise to ignore tax debt. Even if you can’t pay the debt in full right now, you need to look for a way to resolve the matter as quickly as possible.
What Is the IRS Fresh Start Initiative?
The IRS Fresh Start Initiative was implemented by the IRS in 2011 as a way of helping taxpayers who were struggling to pay their bills after the economic crisis of 2008. It was the first several programs the IRS designed for this purpose. The IRS Fresh Start Initiative includes a collection of tax relief options. These options are available to both individual taxpayers and businesses with outstanding tax debts. Not only did this initiative provide new methods of tax relief, but it also simplified the application process for taxpayers.
The IRS Fresh Start Program exists to help taxpayers gain relief from large tax bills they aren’t able to pay immediately. Under this program, you will be able to apply for several different tax relief options that can help you resolve your debt faster and/or eliminate some of the consequences associated with delinquent taxes. For example, one of the programs available allows you to pay what you owe over a finite period of time, making it easier for you to afford the payments. Other options can help you remove tax liens, lower the total amount you need to pay and/or reduce the penalties you owe to the IRS. However, these programs are not available for everyone, and the process of qualifying for it can be difficult. For this reason, we recommend working with a tax professional if you are interested in applying for tax relief under the IRS Fresh Start Tax Relief Forgiveness Program.
Repayment Options With the Fresh Start Initiative
The IRS Fresh Start Initiative offers two main repayment options for taxpayers with outstanding debts. These options include:
- Offer in compromise
- Extended installment agreement
The IRS Fresh Start Initiative also provides relief from tax liens and penalties for qualifying taxpayers. Taxpayers with outstanding debts will not qualify for relief automatically, so it is important to understand the requirements of each program and how the application process works.
Offer in Compromise
The Offer in Compromise is a repayment option available under the IRS Fresh Start Program. Although this option is not used with as much frequency as installment agreements, it is still a possibility for some taxpayers. With this payment option, you make an offer to settle your entire tax debt for less than the amount you currently owe. In some cases, the offer you make may be substantially lower than your balance, resulting in significant savings.
Offers in Compromise have been available to taxpayers for decades, but the Fresh Start Initiative changed the way this tax relief option works.
The Fresh Start Initiative eliminated the dollar limitation imposed on taxpayers requesting an Offer in Compromise. This initiative also increased allowable living expenses and changed the way applicants’ financial situations were analyzed in order to make this program more accessible for a larger number of taxpayers with outstanding tax debts.
In the past, the IRS would consider at least four years of potential income when determining whether to accept a taxpayer’s offer. Under the Fresh Start Initiative, only the next one to two years’ income will be considered. The Fresh Start Initiative also simplified this program for the convenience of taxpayers.
The IRS does not accept every offer made under this program. In fact, many offers will be rejected, especially if they are low in comparison to the total debt owed. In order to give your offer the best possible chance of acceptance, you need to structure it carefully. Your offer should be an accurate reflection of your financial situation. If the IRS believes that you could afford to pay more and/or that they could collect more by pursuing garnishments or other actions against you, they are unlikely to accept your offer. Your offer should also be reasonable based on the total amount you owe.
If the IRS sees that accepting the offer would require them to accept a substantial loss, they are unlikely to agree to it.
Working with a professional tax preparer can greatly increase your chances of success if you want to qualify for an Offer in Compromise. Professional tax preparers have experience with this program, and they can help you calculate a fair offer that will save you money and improve your chances of acceptance from the IRS. In addition, professional tax preparers will ensure that all relevant forms are completed and submitted properly to prevent delays and other issues.
Extended Installment Agreement
Perhaps the most popular option available under the IRS Fresh Start Program is the streamlined extended installment agreement. This option is designed for people who owe no more than $50,000 to the IRS. If you qualify for this program, you will be able to pay off your debts over a maximum of six years.
This option offers several benefits for taxpayers, including:
- No more collection activity from the IRS – Once your extended installment agreement has been approved, the IRS will no longer engage in any other collection activities. This means you won’t have to worry about bank account levies, tax liens, wage garnishments or seizure of your assets.
- No more penalties and interest – The extended installment agreement will stop additional penalties and interest from accruing on your tax debt.
- A longer amount of time to pay – The extended installment agreement allows you to spread out the payment of your tax debt over time, making it easier for you to afford each payment and pay the debt in full.
- No financial statement required – In the past, qualifying for an installment agreement required you to submit a significant amount of documentation to support your claims about your financial situation. Under the Fresh Start Initiative, however, you can apply for an extended installment agreement without submitting a financial statement.
The amount you will be required to pay under the extended installment agreement will depend on several factors, including how much you owe, how much you make each month and the value of your liquid assets. The purpose of this payment option is to provide you an affordable payment option that allows you to repay your debt without experiencing serious financial difficulties.
Keep in mind that it is possible for taxpayers who owe more than $50,000 to qualify for an installment agreement. However, the application process will be much more complicated, and the IRS will likely require you to submit a lot more information about your financial situation before approving any installment plan.
Tax Lien Withdrawal
Tax liens are one of the most common collection tools used by the IRS. The IRS can file a tax lien, which is a legal claim on your property, to secure the payment of back taxes. Before the establishment of the IRS Fresh Start Initiative, the IRS could enact a tax lien when you owed at least $5,000. However, the initiative raised this threshold to $10,000. These liens not only affect your ability to use or sell your assets, but they can also have a negative impact on your credit report.
Tax lien withdrawal is a benefit available to taxpayers who have an IRS lien on their property or accounts and would like to have it removed in hopes of improving their credit scores. Having a better credit score allows you to qualify for car loans, mortgages and other types of credit more easily. Having a tax lien removed from your assets will also eliminate any restrictions related to the lien.
To take advantage of this relief option, you must either pay your debt in full or you must be willing to use direct debit to repay your entire tax debt. After you have set up a direct debit repayment plan or paid the debt in full, you will be able to send a written request to the IRS to have any tax liens withdrawn from your accounts. This can be especially helpful to taxpayers who want to avoid having these liens reported to the credit bureaus. This option will also stop the accruement of additional penalties and interest on your debt.
When you don’t file your tax returns and/or pay your taxes on time, you will likely owe interest and penalties. These fees continue to accumulate over time and can add up quickly. For many taxpayers, these fees make up a large portion of the total debt. Under the Fresh Start Initiative, you may qualify to have some of these penalties reduced or waived. Relief is available for penalties related to failing to make tax deposits on time, failing to pay on time and failing to file a tax return before the established deadline. However, it can be difficult to qualify for this type of relief, and you will need to meet specific requirements.
Choosing the Right IRS Fresh Start Initiative Option
Each of the options available under the IRS Fresh Start Program offers different advantages and disadvantages. Depending on the specifics of your situation, one of these options may be much better for you than the others. In addition, some taxpayers may qualify for more than one type of relief.
Because it can be difficult to determine which of the IRS Fresh Start Program options is best for you, it’s a good idea to talk to a tax professional about your situation before you apply for anything.
A professional who understands these options and has experience with these programs can review your circumstances and help you decide which option will work best for your needs. Tax professionals can also help you complete the application process successfully after you have made a choice.
Qualifying for the IRS Fresh Start Program
Each of the repayment options and relief options available under the IRS Fresh Start Program has its own set of requirements that you must meet in order to qualify. However, there are also general qualifications you will need to meet before you can apply for anything under this initiative.
The general qualifications for the IRS Fresh Start Initiative include:
- No bankruptcy – You cannot apply for any type of relief under the IRS Fresh Start Initiative if you have an open bankruptcy case.
- Federal tax requirements – If you own a business with one or more employees, you must make all federal tax deposits on time.
- Estimated taxes – If you are self-employed or own a small business, you must make all of your required estimated tax payments for the current tax year in order to qualify for relief under the IRS Fresh Start Program.
- Tax return filings – To qualify for relief under the IRS Fresh Start Program, you must have filed all current and past tax returns, regardless of whether you can afford to pay the associated debt.
- Financial hardship – In order to be approved for tax relief, you must be able to show that you are either unable to pay the full debt you owe, or that paying your debt in full would result in significant financial hardship.
How to Apply for the IRS Fresh Start Program
In order to apply for the IRS Fresh Start Initiative successfully, you must follow all of the guidelines the IRS has established. You cannot use any of the repayment options included under this program until you have filed all of your required tax returns, including both current returns and past returns.
If you have outstanding returns to file, make sure you have submitted them before you begin the IRS Fresh Start Initiative application process. In addition, the IRS requires you to file all returns required while you are enrolled in the Fresh Start Program on time.
After you are sure you have filed all of the required tax returns, you can begin the application process online at IRS.gov. The IRS’ Online Payment Agreement tool will allow you to select different repayment plans based on your circumstances and interest. Alternatively, you can also enroll in this program by completing IRS Form 9465 and submitting it to the IRS by mail.
Each of the tax relief options available under this program involves a different application process. While some of these programs offer a quick application process and approval, others may take months or even years to be approved.
Applying for Offer in Compromise
To apply for Offer in Compromise, you will typically need to complete and submit Form 656 and Form 433A. This application process is typically lengthier than the process of applying for an installment agreement.
With an installment agreement, the IRS is usually able to collect most or all of your outstanding debt, so they are more likely to approve this arrangement. Offer in Compromise, however, requires the IRS to take a loss. Thus, the application process typically involves more scrutiny.
The IRS may accept your Offer in Compromise if it falls into one of three categories. The most common reason for acceptance of an Offer in Compromise is the applicant’s inability to pay. If the IRS believes that they would not be able to collect the full debt from you anyway, they are more likely to accept your offer and take their losses. The second reason for acceptance of an Offer in Compromise is severe economic hardship.
You must show that, although you have the income or assets to pay your tax debt, payment would cause severe economic hardship. The least common reason for acceptance of Offer in Compromise involves doubts about your tax liability. If there is evidence indicating that you may not owe the full amount held against you, the IRS is more likely to accept a lower offer.
Applying for an Installment Agreement
The IRS Fresh Start Initiative expanded and streamlined installment agreements, but some of these agreements were already available. Specifically, taxpayers can apply for one of five different installment agreement options based on their circumstances.
- Guaranteed Installment Agreements: Guaranteed installment agreements are available only to taxpayers who owe a balance of no more than $10,000. This type of agreement must include no more than three years of payments.
- Streamlined Installment Agreements: Streamlined installment agreements are available to taxpayers who have a maximum balance of $50,000. A streamlined installment agreement may include up to six years of payments.
- Partial Pay Installment Agreements: Partial pay installment agreements are similar to Offer in Compromise. With a partial pay installment agreement, you will pay less than you actually owe, but the payments will be made over time. Generally, payments are made until the IRS statute of limitations on collections expires.
- In-Business Trust Fund installment agreements: In-business trust fund installment agreements are designed for debts of no more than $25,000. Taxpayers must repay their debts within
- Routine installment agreements months under this type of installment agreement: Routine installment agreements are designed for taxpayers with balances too large for the other options. Routine installment agreements often include longer payment periods as well.
You can apply for an installment agreement online using the IRS Online Payment Agreement tool. Depending on the specifics of your situation, you may need to provide a variety of information. You will also need to verify your identity before you can begin the application process.
If you can’t use the Online Payment Agreement tool to apply, or if you would rather not apply online, you can apply by mail. Simply complete and mail in IRS Form 9465. You may need to attach supporting documents in some cases.
Applying for Tax Lien Withdrawal
After you have met the requirements for a tax lien withdrawal, either by paying your debt in full or established in acceptable payment program, you can apply to have liens removed from your accounts or property. To apply for this type of tax relief, you must complete and submit Form 12277, Application for Withdrawal.
Applying for Penalty Relief
Qualifying for penalty abatement is rarely easy. However, you may be able to convince the IRS to waive some or all of your penalties if you can show that:
- You have never received a penalty before or have not had a penalty in the last three tax years.
- You were involved in a major disaster, such as an earthquake, hurricane or fire. It is easier to qualify for penalty abatement due to a major disaster if the same disaster affected a significant number of taxpayers in your area.
- A tax adviser gave you bad or inaccurate advice.
- An IRS agent gave you bad or inaccurate advice.
There are other requirements you must meet as well. You may be able to apply for penalty relief online, over the phone or by mail. In some cases, your application will be approved immediately. In other cases, it may take more time. If the IRS denies your request for penalty abatement, you can appeal the decision online.
Keep in mind that the IRS does not typically offer relief from interest. However, if you qualify for penalty relief, any associated interest will be removed from your account as well.
Is Tax Relief Right for You?
If you owe a substantial debt to the IRS and you don’t think you can pay it in full, it may be time to consider applying for tax relief. However, tax relief is not appropriate for everyone. Although tax relief may help you eliminate some of the debt you owe or improve your credit score, it may come with strings attached as well.
For example, if you apply for certain types of tax relief, you may need to provide self-incriminating documents to the IRS, and/or you may need to agree to extend the IRS statute of limitations on collection. For some taxpayers, this may lead to more problems than benefits.
If you are not sure whether you should apply for a tax relief program in your situation, it may be in your best interest to talk to a tax professional. Someone who has experience with back taxes and tax relief will be able to examine your circumstances and help you decide on the best course of action. Tax professionals can also help you choose the best tax relief option if you choose to apply.
Benefits of Working with a Tax Professional
It is possible to apply for tax relief on your own. However, for most taxpayers, it is better to work with a tax professional. This is especially true for expat taxpayers, who often face unique situations when it comes to back taxes and delinquent tax returns.
Some of the benefits of working with a tax professional to apply for programs under the IRS Fresh Start Initiative include:
- Knowledge and expertise: The laws and requirements surrounding tax relief under the IRS Fresh Start Initiative can be complicated and difficult to understand. However, tax professionals have the experience and training necessary to make sure you have all of the information you need to make the right decisions every step of the way.
- Accuracy: Complying with all of the IRS’ requirements during the application and repayment process can be a challenge. When you are working with a tax professional, however, you can rest assured that all of your forms will be completed properly, that you will be in compliance with all deadlines and that all of the supporting documentation has been submitted to the IRS.
- Guidance throughout the process: Depending on the type of tax relief you need, the process of applying and repaying your debt may be lengthy. A tax professional will provide guidance and support throughout this process so you can see it through to the end successfully.
- Protection from further problems: In some cases, applying for tax relief may require you to disclose a substantial amount of information about your financial situation. A tax professional will be able to tell you whether the information you disclose could be used against you in an audit or criminal investigation.
- Higher application acceptance rate: The IRS does not accept every application for tax relief. However, tax professionals have experience with this process, and they can help you maximize your chances of having your application accepted. They can also advise you with regard to the likelihood of acceptance so you know what to expect.
- More advantageous arrangement: You may qualify for more than one type of tax relief. However, certain types of tax relief may be more beneficial to you than others. A tax professional can tell you which program would be most advantageous in your situation. Your tax professional can also help you negotiate a better arrangement with the IRS in many cases.For example, if you are hoping to apply for Offer in Compromise, your tax professional can help you calculate an offer that maximizes your chances of acceptance while also minimizing the total amount you will be required to pay the IRS.
Contact Tax Samaritan
At Tax Samaritan, we are a boutique tax firm serving United States taxpayers who are living and working abroad. We understand all of the complicated tax laws that apply to expat taxpayers. We also have extensive experience helping clients apply for and utilize tax relief programs included under the IRS Fresh Start Initiative.
Expat taxpayers often have delinquent taxes and returns for a variety of reasons. Whatever your situation may be, we can help you explore the option of tax relief and decide if it is right for you. We can also guide you as you complete the application and repayment process. Please contact us today to discuss your tax situation.
At Tax Samaritan, We Rescue Troubled Taxpayers
Click the button below to request a Free Tax Debt Analysis today to get started with the resolution of your tax problems.