MARCH 2012 Compliance Matters

Some struggling taxpayers looking for help were given a life preserver from the Internal Revenue Service this month. Just weeks before tax day, the agency announced a significant expansion of “Fresh Start”, its program designed to offer help to strapped taxpayers who can’t meet their tax obligations. Important new provisions target penalty relief to the unemployed, and allow more people to make installment payment agreements with the IRS. These new provisions are part of an ongoing IRS effort that began in 2008 to address the plight of taxpayers hit hard by the economic downtown.

Under the new provisions, those who have been unemployed for 30 days or longer can now avoid failure-to-pay penalties. The IRS is also doubling the dollar requirement for eligibility for installment agreements, expanding the number of taxpayers who can take advantage of the program.

A six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed taxpayers. A request for an extension of time to pay will result in relief from the failure-to-pay penalty for tax year 2011. This is provided the tax, interest and other penalties due are paid in full by Oct. 15, 2012. Failure-to-pay penalties are generally half of 1 percent per month of the tax due up to a maximum of 25 percent. Despite the new provisions, the IRS still charges interest on unpaid back taxes at a current rate of 3 percent per year.

Those who qualify for penalty relief include:

Workers unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17, 2012 filing deadline
Self-employed people who experienced a reduction of 25 percent or more business income due to the economy in 2011
However, relief is not available for everyone. The measures are aimed at taxpayers with an income of not more than $200,000 for a married couple filing jointly or $100,000 for a single or head-of-household filer. Taxpayers who owe more than $50,000 are not eligible for relief.

Taxpayers must still file their 2011 returns by April 17, 2012 even if they qualify for Fresh Start relief.

IRS Installment Plan and Offers in Compromise

The new Fresh Start provisions raised the threshold from $25,000 to $50,000 for taxpayers using an installment agreement without having to supply the IRS with a financial statement. This represents a major reduction in the burden to taxpayers.

Those who owe no more than $50,000 in back taxes can now enter into streamlined installment agreements with the IRS that allow them to pay off what they owe over months or years. The maximum term for installment agreements has also been raised from 60 to 72 months.

Another great deal for struggling taxpayers is the Offer in Compromise program, which allows taxpayers to settle up with the IRS for less than the full amount they owe. The agreement is based on the agency’s financial analysis of the individual’s ability to pay based on income and assets.