Don’t be misled: The IRS fresh start program won’t wipe out all your debt

The Internal Revenue Service Fresh Start program does not wipe out all tax debt, even though many ads claim it does. The “Fresh Start” name actually refers to changes made to existing tax relief options, not a brand-new program. Many taxpayers first hear about it through advertisements promising debt forgiveness, which creates confusion.

In reality, the program was meant to make it easier for people and small businesses to qualify for existing relief. The Fresh Start initiative started in 2011 during an economic slowdown to help taxpayers manage back taxes, as reported by USA Today. The goal was to help taxpayers repay debt and avoid extra burden, according to the IRS. It did not create a new forgiveness plan, but changed existing rules.

Fresh Start changes explained

The IRS increased the dollar limit for filing federal tax liens, leading to fewer liens. The program made it easier to remove tax liens after paying debt. More taxpayers could qualify for lien withdrawal when entering Direct Debit Installment Agreements. Access to installment payment plans was expanded. Eligibility for Offer in Compromise settlements was broadened.

No automatic debt cancellation

Even today, the term “Fresh Start” is mostly used in marketing, not as an official separate program. The program does not automatically cancel tax debt. Approval depends on financial situation, compliance history and IRS decision. Fresh Start mainly affects three relief areas: Offer in Compromise, installment agreements and tax lien rules, as stated by USA Today. It does not apply to tax credits or rebates. An Offer in Compromise lets some taxpayers settle for less than they owe.

Under Fresh Start, income and debt limits were increased for Offer in Compromise. The IRS allowed taxpayers with income up to $100,000 and debt below $50,000 to participate in streamlined OIC, as per the IRS 2011 announcement, as stated by USA Today. Approval for settlement is not guaranteed. The IRS only accepts OIC if taxpayer cannot pay full debt in reasonable time.

Installment payment plans

Installment agreements allow taxpayers to pay monthly over time. Fresh Start increased balance limits for streamlined installment plans. Payment plans are available to taxpayers owing $50,000 or less, according to Karen Wallace. Short-term payment plans allow up to 180 days to pay full amount. Short-term plans are available to balances of $100,000 or less, as cited by USA Today.

Eligibility and approval rules

Earlier, installment agreements were capped around $25,000, so more people now qualify. Fresh Start also changed tax lien rules. The IRS raised the lien filing threshold from $5,000 to $10,000. Some taxpayers can withdraw liens after starting payment plans. Liens may also be removed after consistent payments or full resolution. Relief under Fresh Start is not automatic. (USA Today)

The IRS reviews each taxpayer individually. Applicants must submit detailed financial information. The IRS uses Reasonable Collection Potential (RCP) to estimate what it can collect. Taxpayers must file all required tax returns first. They must be current on estimated tax payments if applicable. Applicants cannot be in active bankruptcy. Businesses must stay up to date on federal tax deposits. Failing these requirements can lead to denial.

The IRS evaluates income from all sources. The IRS reviews assets like bank accounts, property and investments. Allowable living expenses are considered. RCP helps determine eligibility for settlement programs. People on fixed incomes like retirees may qualify. Individuals facing financial hardship may qualify, as noted by USA Today. Those unable to cover living expenses while paying tax debt may qualify. Long-term unemployed individuals may qualify.

Small business owners with major losses may qualify. People with high disposable income may not qualify. Those with large assets or equity may not qualify. Taxpayers who haven’t filed returns may be denied. Those in bankruptcy usually do not qualify. One common myth is that Fresh Start wipes out all debt.

Fresh Start myths vs reality

• Reality: full debt cancellation is rare.
• Another myth: everyone qualifies.
• Reality: strict requirements still apply.
• Myth: Fresh Start is temporary.
• Reality: it is ongoing policy changes.
• Myth: approval is automatic.
• Reality: IRS reviews each case.

Taxpayers apply by submitting forms and documents. They can apply themselves or use a tax professional. Form 656 is used for Offer in Compromise. Forms 433-A and 433-B provide financial details. OIC usually includes $205 application fee. Installment agreements may have setup fees. Short-term plans often have no setup fee. Some low-income taxpayers may get fee waivers. Processing time for OIC can take months or over a year, as noted by USA Today.

Interest and penalties may continue during review. Tax relief companies or professionals can help prepare documents. They can negotiate with IRS on behalf of taxpayers. But no company can guarantee approval. The IRS makes final decision in all cases. Eligibility depends on financial situation and compliance history. Taxpayers should compare income with expenses first. They should confirm all returns are filed. Consulting a CPA, enrolled agent or tax attorney may help. Fresh Start may reduce or restructure debt, but it does not erase everything.

FAQs

Q1. Does the IRS Fresh Start program cancel all tax debt?

No, the IRS Fresh Start program may reduce or restructure tax debt, but it rarely wipes out the full amount.

Q2. Who can qualify for the IRS Fresh Start program?

Only taxpayers who meet IRS income, asset and compliance rules may qualify for payment plans or settlement options.