What is the Difference between the IRS Fresh Start Program and an Offer in Compromise?

What is the Difference between the IRS Fresh Start Program and an Offer in Compromise?

You may have seen advertisements about tax relief available through the IRS Fresh Start program for taxpayers who qualify.  You might have also read articles about paying less than you owe via the IRS Offer in Compromise.  These programs often get confused and some of the articles and advertisements referencing them are a little misleading.  We’re going to clear it up for you now.

In a nutshell, the Fresh Start program consists of changes to IRS collection policy that expand existing IRS resolution programs with a view to help struggling taxpayers with back taxes.  An offer in compromise is an IRS resolution program whereby certain taxpayers can settle their tax debt for less than they owe.  The 2012 policy changes made by the Fresh Start initiative had the effect of making it easier to qualify for an offer in compromise and reducing the offer amount.

The IRS Fresh Start Program

The IRS Fresh Start program was created in 2011 to modify collection practices in an effort to provide more resolution options for taxpayers with overwhelming tax debt.

Initially these policy changes included relaxed lien-filing criteria and more favorable installment agreement terms.  Specifically, the 2011 changes included the following:

• Relaxed Lien Filing Criteria: The IRS increased the tax balance to trigger a lien filing from $5,000 to $10,000.
• Expansion of Streamlined Installment Agreements: This section describes historical Fresh Start changes. Current eligibility, payment terms and lien decisions require review of current IRS procedures. Related resources: tax lien.
• Removal of Federal Tax Lien: The IRS will now allow taxpayers to withdraw the tax lien from the public record under certain circumstances (this was not an option before Fresh Start).
• Allowance of Conditional Living Expenses: As long as the taxpayer can fully pay their taxes within 6 years or before the statute expires, the IRS will allow discretionary expenses above their national standard thresholds.

The 2012 changes made by the Fresh Start program exclusively relate to the offer in compromise (“OIC”) program and had the effect of making it easier for a taxpayer to qualify for settlement and making the settlement amount more affordable.   The expansion focused on the financial analysis used to determine which taxpayers qualify for an OIC and included:

• Revising the calculation of taxpayer’s future income.
• Allowing taxpayers to repay student loans.
• Allowing taxpayers to pay state and local past due taxes.
• Expanding the allowable living expense category and amount.
• Reducing the offer amount for people who qualify for an OIC.

Based on the above changes to the OIC program, some of the most financially distressed taxpayers became eligible to clear up their tax problems more quickly.  Specifically, expenses like student loans and monthly installment agreement payments toward state taxes could be considered as offsets to taxpayer’s income when determining ability to pay.  Also, the offer amount was significantly reduced as it became based on one year of monthly household disposable income instead of four.

To sum up, although “the IRS Fresh Start Program” has been widely used as an umbrella term to describe any kind of IRS tax relief based on ability to pay, as discussed above, that is not accurate.  Rather, the Fresh Start program consists of IRS collection policy changes that were made in 2011 and 2012 which had the effect of expanding existing IRS resolution programs so that more taxpayers could establish favorable payment terms with the IRS.

IRS Offer in Compromise

There are three main IRS resolution programs: the Offer in Compromise (“OIC), the installment agreement, and currently not collectible status.

The IRS offer in compromise allows eligible taxpayers to settle their outstanding tax liabilities for less than they owe.  It presents a solution for taxpayers who can’t fully pay the tax liability or when doing so would create a financial hardship.  The following factors are considered:

• Taxpayer’s ability to pay (monthly household disposable income).
• Taxpayer’s income.
• Taxpayer’s expenses.
• Taxpayer’s asset equity.

Generally, the IRS will accept an offer in compromise when the offer represents the most the taxpayer can pay within a reasonable period of time.  A determination as to ability to pay turns on monthly household disposable income as calculated by the IRS based on individual factors related to income, expenses, and assets.

You may not have a viable offer in compromise if your financial analysis is inconsistent with the IRS analysis.  Also, any equity you have in a home, car and/or investments will likely influence the offer amount.  It is important to consult with an experienced tax attorney before submitting your offer, as doing so will toll the statute of limitations and your deposit will not get returned if your offer is rejected.

Review current IRS application instructions for the offer basis, filer and payment option. Forms, supporting information, fees and payments vary; do not assume every applicant uses the same package.

Follow the written acceptance and applicable offer terms. Payment requirements depend on the selected option, and future compliance obligations continue.

Do You Need a Tax Attorney?

A competent tax attorney understands the difference between the Fresh Start program and the three main IRS resolution programs including how Fresh Start has specifically expanded these programs to provide more opportunities for tax relief to struggling taxpayers with back taxes.

Confirm consultation terms, fees, staffing and the scope of any proposed work directly with the firm. Obtain the engagement terms in writing; no particular outcome is promised. Related resources: offer in compromise.

Outcomes depend on the applicable rules and facts. Review the available options for the particular matter; another taxpayer’s result does not predict yours.

• know how the IRS determines ability pay, what offers will be accepted, and the substantiation required to get your offer through.
• are well versed in the forms, filings and documentation required to submit an offer.
• have extensive experience working with offer specialists and understand the process involves a high level of scrutiny akin to a mini audit.
• understand the drawbacks to submitting an offer that will not succeed (extending the time the IRS has to collect the tax).

Identify the work needed for your tax matter and confirm the proposed representative’s qualifications, jurisdictional authority and scope of engagement. Do not assume a particular office location, service commitment or result. Related resources: offer in compromise; penalty abatement.

Confirm consultation terms, fees, staffing and the scope of any proposed work directly with the firm. Obtain the engagement terms in writing; no particular outcome is promised.

Related guidance: IRS Fresh Start Program Help.