The IRS Tax Debt Forgiveness Program Explained 

June 09, 2020 by Jean Lee Scherkey, EA

These days, it seems like just about everyone is looking for a fresh start, a way to wash the uncertainty and sadness surrounding the last couple of months away. Any proactive step we can take now in our lives will give us the momentum and hope to pull through these uncertain times. While a cure to the Covid-19 epidemic may still be waiting to be discovered, those who owe taxes to the IRS have the potential to be alleviated from their tax debt now.

There is a lot of talk online about the “IRS Tax Debt Forgiveness Program.” You may be surprised to know that the IRS does not have an official “Debt Forgiveness Program.” However, there are other programs and initiatives the IRS has launched. Beginning in 2011, the IRS launched the Fresh Start program. Since then, the IRS has expanded the program in the hopes of assisting more taxpayers who carry federal tax debt.

The IRS Fresh Start program includes the following:
 

• Higher Tax Lien Thresholds - Generally, the IRS will not issue a tax lien on a taxpayer’s home or other assets unless the total debt owed is $25,000 or more. Initially, the threshold was set at a debt of $5,000 or more. The taxpayer may request the IRS to remove the lien from their property if the amount of tax due is $25,000 or less and they have an installment agreement where the monthly payments are automatically withdrawn from their bank account (known as Direct Debit). To request the withdrawal, the taxpayer must also agree to pay the entire amount due within sixty months or before the Collection Statute expires, whichever is earlier. Generally, the Collection Statute Expiration date is ten years from the date the tax is assessed. Furthermore, the taxpayer must have made at least three consecutive direct debit payments and comply with all other IRS filing and payment requirements. Once a taxpayer meets all the requirements of a direct debit payment plan, the taxpayer may complete and submit to the IRS Form 12277, Application for Withdrawal Notice of Federal Tax Lien.
  
  Having an IRS lien withdrawn is a considerable benefit to a taxpayer. The most common asset the IRS places a lien on is the taxpayer’s home. Once the IRS places a lien on a home, the lien will take precedence over an existing mortgage. This means that if a taxpayer wants to refinance their current mortgage, they will need to request the IRS to make their lien subordinate or second to the mortgage loan. Successfully requesting the IRS to subordinate a lien is not an easy feat, and it is not uncommon for the IRS to deny the request. Despite that many may not relish the thought of the IRS’s hand reaching automatically into their bank account every month, the trade-off of a lien withdrawal may be worth it. IRS liens are recorded on a person’s credit report, and obtaining a lien withdrawal should improve their credit rating.


• Extended Installment Agreements - In addition to extending the amount of time a taxpayer has to repay the tax due on an installment agreement, the IRS streamlined the overall installment agreement process. Most installment agreements may now be requested online. For Streamlined Installment Agreements, taxpayers have up to seventy-two months to pay the tax due in full, or by the time of the Collection Statute Expiration date, whichever is earlier.
  
  If certain conditions are met, a taxpayer is not required to submit a Collection Information Statement when applying for a Streamlined Installment Agreement. A Collection Information Statement is a form that reports to the IRS a taxpayer’s bank, investment, whole life insurance contracts, and retirement accounts; any real estate or other assets the taxpayer owns, credit cards held, wage and other income information, and monthly living expenses. If the taxpayer’s total balance due for all tax years is $25,000 or less, they will not be required to submit a completed Collection Information Statement. If a taxpayer owes between $25,001 and $50,000, they can forgo the requirement of providing a Collection Information Statement if the monthly payments are directly debited from their bank account, or if the payments are withdrawn automatically by their employer through a payroll deduction agreement.
  
  Through the expanded installment agreement provisions, a taxpayer who owes between $50,001 and $100,000 may also request a Streamlined Installment Agreement. If a taxpayer’s total tax liability is between $50,001 and $100,000, they will have the earlier of either eighty-four months or the Collection Statute Expiration date to pay the entire tax due. Furthermore, the taxpayer will not be required to complete a Collection Information Statement if they choose to have their monthly payments made via direct debit or a payroll deduction.
  
  For taxpayers who cannot pay the entire tax due within the Installment Agreement timeframe, they can request to enter into a partial payment installment agreement (PPIA). With this type of installment agreement, the IRS and taxpayer agree on a modified payment plan based on the taxpayer’s ability to pay. The agreed-upon payments will be made until the collection statute expiration date. With a PPIA, taxpayers will need to complete and submit a Collection Information Statement.


• Penalty Tax Relief - The IRS Fresh Start program opened the door to more relief from tax penalties. IRS penalties can be staggering and can make a tax balance due seem impossible to pay. Having more opportunities for taxpayers to reduce or eliminate the penalties accrued on tax due may save a taxpayer hundreds if not thousands of dollars.
   
• Expansion of the IRS’s Offer in Compromise Program - An Offer in Compromise (OIC) allows a taxpayer to settle their debt for less than the full amount owed. Generally, the IRS will accept an OIC when the amount offered represents the most the IRS can reasonably expect to collect within the Collection Expiration date. With the Fresh Start program, the IRS streamlined the complicated process of submitting an offer, making it easier for taxpayers to qualify. However, if a taxpayer can pay the total tax due through an installment agreement or other means, the IRS will likely reject a submitted OIC. The IRS has an Offer in Compromise Pre-Qualifier tool on their website that helps taxpayers determine if they qualify to start the OIC process.