Even the most responsible small business owner can fall behind on their taxes. Every year, unexpected slowdowns, expenses, and other financial hardships prevent people from paying the Internal Revenue Service on time.
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Example H2 Example H3 Example H4 Example H5 Example H6 Tired of doing your own books?Regardless of how you incurred the tax debt, though, it’s important to take action now. While the IRS won’t take a “forgive and forget” approach to your tax debt, they do offer several methods to help you pay down and eventually eliminate the outstanding balance. The Fresh Start program covers several of these options.
The Fresh Start initiative, established by the IRS in 2011, is an umbrella term for a group of programs available to individual taxpayers and small businesses that owe money to Uncle Sam. The IRS launched Fresh Start in the wake of 2008’s Great Recession to help struggling taxpayers get back in good standing.
The Fresh Start program offers several options that allow small business owners to clear their tax liabilities, including an Offer in Compromise, installment agreements, penalty abatement, or the Currently Not Collectible status. These relief programs allow qualified taxpayers to reduce their debt, pay down debt in installments, eliminate penalty charges, or stop all collections proceedings.
Under the Fresh Start program, taxpayers benefit because they can pay down their debt while avoiding more severe consequences like tax liens, levies, or jail time. Fresh Start also makes the IRS happy because it allows them to collect something instead of nothing.
To qualify for any Fresh Start program, the IRS requires that you be fully current with all tax returns.
In addition to ensuring all your past financial records are organized, actions you can take to make your Fresh Start application process easier include:
If you’re a small business owner and behind on your bookkeeping, Bench’s team of experienced specialists can get you caught up fast, as well as help you find deductions that can decrease your total tax debt. Learn more.
We can also put you in touch with one of our trusted tax resolution partners, like 20/20 Tax Resolution. They can help you navigate the application process and make sure to address any of your concerns throughout the process. They’ll even represent you in front of the IRS.
Because there are many options under the Fresh Start program, working with a tax professional—like a tax attorney, enrolled agent, CPA, or tax resolution firm—to determine which program is appropriate for your situation is always a good idea. The IRS denies many applications for tax relief simply due to incomplete or inaccurate information.
If you’d like to start your research before reaching out to a professional, read on for a more detailed breakdown of the Offer in Compromise, installment agreements, penalty abatement, and the Currently Not Collectible status.
The IRS recognizes that a small business owner may have legitimate reasons for being unable to pay their back taxes or even file for an extension. An Offer in Compromise, or OIC, is an agreement between you and the IRS that reduces the amount of taxes you owe.
The IRS may approve the OIC agreement if your original debt balance is considered uncollectible because your liabilities exceed your assets and income. However, this doesn’t mean that you can haggle with the IRS on any amount to settle your tax bill. Instead, the IRS arrives at a reduced tax debt figure with the Reasonable Collection Potential, or RCP. This is the final amount that the IRS estimates it can fully collect.
The IRS recently made the following changes to make it easier for taxpayers to qualify for the OIC program:
The IRS offers two ways for you to pay your tax debt with an OIC.
There are pros and cons to using the OIC as a tax debt payoff solution.
To qualify for the OIC, you must be up-to-date on all business tax form submissions. A history of bankruptcy proceedings automatically disqualifies you from eligibility.
Check your eligibility for the OIC by completing an online pre-qualifying questionnaire. After confirming eligibility, visit the OIC application package containing all the necessary forms and step-by-step instructions.
If you don’t qualify for the OIC, the IRS offers payment installment agreements as an alternative solution. An installment agreement allows you to pay off your tax debt in more affordable monthly payments.
If you owe less than $50,000, you can apply for a Streamlined Installment Agreement or SLIA. In this agreement, you pay the entire debt balance, including any added penalties and interest charges, within 72 months. The SLIA requires you to pay the installments via direct debit from your bank account.
The SLIA can’t be used if your business owes more than $50,000 in back taxes. However, the IRS does offer other types of installment agreements that can address your specific debt situation, and you can apply for the SLIA if you can pay your balance down to the $50,000 threshold.
The installment agreement has its share of pros and cons too:
If you owe $25,000 or less, you can apply online for a long-term installment agreement. This requires you to establish an online account with the IRS, verify your identity, and provide the IRS with information about your business.
If you cannot apply online, you can complete and mail the required forms to the IRS or apply by phone. The phone number to call is 1-800-829-0922.
The IRS automatically adds penalties to your outstanding debt when you fail to file a return, pay on time, or deposit any required taxes. If you don’t take action, these penalties quickly add up and increase your total tax debt amount.
The good news is that penalty abatement (or relief) is another possible option to reduce your total tax liability. Under this program, penalty charges are forgiven, but interest continues to accrue on the unpaid tax balance.
Applying for a tax abatement isn’t an easy process, though. The IRS requires you to show reasonable cause to have the penalties removed, under strict requirements. “Reasonable cause” includes natural disasters, fire, the inability to obtain records, or death or serious illness or injury directly affecting you or a member of your immediate family.
The IRS requires documentation to prove the reasonable cause along with the penalty abatement letter. Your word alone won’t do—court and hospital records may be necessary to substantiate the reasons you need the penalties removed.
To qualify for a first-time abatement, you must meet the following criteria:
If you receive a notice from the IRS, the first step is to contact them by phone at 1-800-829-1040 to verify whether the penalty is valid. If it is, you can get more information on how to get relief through their reasonable cause requirements.
The Currently Not Collectible status, or CNC, is the IRS’s way of putting the brakes on the collections process. Under the CNC, the IRS halts wage garnishments, collection actions, and any deferred debt payments.
The IRS determines if your case is eligible for CNC status by comparing your total positive income and investments with the national and local standard living expenses. These expenses include everyday living necessities, health care, housing, and transportation costs. If the IRS determines that paying off your tax debt after these expenses puts you at risk for severe financial hardship, they will consider the account uncollectible.
Your account can remain in the CNC status indefinitely as long as your financial status doesn’t change. The IRS will periodically review your account to see if you can begin making full or partial payments as your financial situation improves.
If your income does not improve after the IRS’s 10-year statute of limitations for collection runs out, the IRS writes off the tax debt. If your financial status is long-term or even permanent, CNC is your best option for tax relief.
To prove financial hardship for the CNC status, file IRS Form 433-B to document your business’s collection information. You will need to list detailed information on all of your assets and their market values, as well as how much income you earned and spent in the last three months.
There are many situations that can cause you to fall behind on your taxes, but when this happens, it’s important that you follow up as soon as possible with the IRS to resolve the debt. With the IRS Fresh Start initiative, there are several ways to ease your tax burden through affordable payment agreements.
If you're a small business owner who needs help getting started, chat with our specialized team about your options today.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.