In 2011, the IRS made additional changes to tax lien policies and expanded the threshold for small businesses resolving tax issues through installment agreements.

The most important features of the Fresh Start Program concern:

1. Tax Liens,
   
   
2. Installment Agreements, and
   
   
3. Offers in Compromise.
   

In addition, certain taxpayers who have been unemployed for 30 days or longer and self-employed individuals who experienced a 25 percent or greater reduction in business income will be able to avoid failure-to-pay penalties.

Let’s have a look at the three features mentioned above.

• (1) A Federal Tax Lien is an IRS demand for payment from the taxpayer, within 10 days of the letter delivering a copy of the lien. This is a statutory process which the IRS must follow.
  

The Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien to $10,000, up from $5,000. However, in some cases, the IRS may still file a lien notice on amounts less than $10,000.

There is an exception in the case of a taxpayer bankruptcy or other similar action.

When a taxpayer meets certain requirements and pays off their tax debt, the IRS may now withdraw a filed Notice of Federal Tax Lien. Taxpayers must request this in writing using Form 12277, Application for Withdrawal.

Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers also need to request this in writing by using Form 12277.

If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions.

An installment agreement is an option for those who cannot pay their entire tax bills by the due date. Penalties are reduced, although interest continues to accrue on the outstanding balance. In order to qualify for the new expanded streamlined installment agreement, a taxpayer must agree to monthly direct debit payments.

Individual taxpayers who owe up to $50,000 (amount raised from the maximum of $25,000 in previous years) can pay through monthly direct debit payments for up to 72 months (six years).

While the IRS generally will not need a financial statement, they may need some financial information from the taxpayer. The easiest way to apply for a payment plan is to use the Online Payment Agreement tool on the IRS website.

Taxpayers in need of installment agreements for tax debts more than $50,000 or longer than six years still need to provide the IRS with a financial statement. In these cases, the IRS may ask for one of two forms: either Collection Information Statement, Form 433-A or Form 433-F.

• (3) An Offer in Compromise (OIC) is an agreement that allows taxpayers to settle their tax debt for less than the full amount. The Fresh Start expanded and streamlined the OIC program. The IRS has now more flexibility when analyzing a taxpayer’s ability to pay. This makes the offer program available to a larger group of taxpayers.

An OIC is essentially an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Before accepting an offer, the IRS examines the taxpayer’s income and assets to determine their reasonable collection potential. Note that an OIC is generally not accepted if the agency believes the liability can be paid in full as a lump sum or through a payment agreement.

Under the new guidelines, when the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or less months — this is down from the previous requirement of four years.

For offers paid in six to twenty-four months, the new guidelines are based on two years of future income (instead of five years). It’s important to remember that OICs must be fully paid within twenty-four months of the date the offer is accepted.

Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable period of time. The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement.

The allowable living expense standards (which are used to determine a taxpayer’s ability to pay) have been expanded. Allowable living expense standards now include items such as credit card payments and bank fees and charges, payments for student loans guaranteed by the Federal government, and payments for delinquent state and local taxes.

To confirm your eligibility and prepare a preliminary proposal, check the Offer in Compromise Pre-Qualifier on the IRS website. You'll also find step-by-step instructions and all the forms for submitting an offer in the Offer in Compromise Booklet (Form 565-B).

If you owe back taxes to the IRS, now would be the perfect time to resolve your situation since at this time there is no knowing when the new rules will expire.