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: Taxpayers can now avoid a tax lien and set up a payment plan if they owe less than $50,000 (it used to be $25,000) and if they pay it off within 72 months (it used to be 60 months).
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.

The forms necessary to submit an offer include the 433A-OIC and the 656 which must be accompanied by the application fee and initial offer payment (typically 20% of the offer amount). An offer in compromise will get returned if you are not in filing compliance, you have not made your quarterly estimated tax payments, or if you are in open bankruptcy proceedings.

If your offer is accepted, you must pay the balance of the offer amount within the specified timeframe (typically 5 or fewer months) and abide by the terms of the acceptance (e.g., remain in compliance). If your offer is rejected, you may appeal that decision within 30 days of the rejection notice.

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.

Of all three resolution programs, the offer in compromise is the most coveted. However, the national acceptance rate for IRS offers in compromise is only 24%, highlighting how difficult it can be to get an offer through. It is advisable to consult a tax attorney with expertise in this area to determine whether you are eligible to submit an offer and what the offer amount should be.

The experienced tax attorneys at Segal, Cohen & Landis have successfully settled our clients’ outstanding tax liabilities for significantly less. We have a 95% acceptance rate for all offers submitted on behalf of our clients because we:

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).

If you don’t qualify for an offer in compromise, we explain every other possible way to resolve your tax liability which may include penalty abatement and partial pay installment agreement or hardship status until the statute expires, which also have the effect of reducing the amount you would otherwise have to pay over the life of the statute.

If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us. We would be happy to speak with you and will advise you how we can resolve your case and how much it would cost.