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IRS Offers New Penalty Relief and Expanded Installment Agreements

The Internal Revenue Service (IRS) is expanding its “Fresh Start” initiative to help the unemployed and struggling taxpayers. Under the program, new penalty relief options are available and eligibility for Installment Agreements has been expanded. The IRS previously expanded a streamlined Offer in Compromise (OIC) program.

A summary of the changes is below.

New penalty relief for the unemployed on failure-to-pay penalties

A six-month grace period on failure-to-pay penalties will be made available to:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012. The penalty relief does not include interest on unpaid back taxes. Taxpayers will still be charged interest on unpaid back taxes, which is currently 3 percent on an annual basis.

Taxpayers owing up to $50,000 in back taxes are now eligible for streamlined installment agreements

Installment agreements allow taxpayers who cannot pay the entire tax bill by the due date and option to pay over an extended period of time. Penalties may be reduced but interest continues to accrue.

Changes include:

  • The threshold for using an installment agreement without having to supply the IRS with a financial statement has been raised from $25,000 to $50,000.
  • The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum.
  • Taxpayers may pay down their balance due to $50,000 or less to take advantage of this payment option.
  • Taxpayer must agree to monthly direct debit payments.

Offers in Compromise program tries to more closely reflect real-world situations

An offer-in-compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

Changes to the OIC program were initially put in place during the first round of the Fresh Start initiative and continue to evolve. The IRS recently said,

“The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place more common-sense changes to the OIC program to more closely reflect real-world situations.”

“For example, the IRS has more flexibility with financial analysis for determining reasonable collection potential for distressed taxpayers.”


Please see the IRS website for more details or contact a tax attorney with specific questions.