The Internal Revenue Service is offering penalty relief and is expanding the use of streamlined installment agreements in an effort to help taxpayers pay off any outstanding balances owed to the government. These two programs are part the IRS's Fresh Start Initiative.
The IRS is willing to waive the failure-to-pay penalty on 2011 taxes. This late payment penalty is half of one percent for each month or part of a month that a tax is not yet paid in full. To qualify for this waiver, taxpayers:
- Must be unemployed for at least thirty consecutive days in 2011 or from January 1 to April 17, 2012; or
- Have suffered a 25% or greater decrease in self-employment income; and
- Have income not more than $100,000 for unmarried individuals or $200,000 for married couples; and
- File their 2011 tax return either by the April 17th deadline, or request an extension and subsequently file by the October 15th deadline; and
- The balance owning on their 2011 tax return must be not more than $50,000; and
- The entire balance must be paid in full by the October 15th deadline.
Taxpayers meeting these criteria can request that the failure-to-pay penalty be removed by filling out brand new Form 1127A (pdf).
It's not very often that the IRS grants penalty relief. For taxpayers who are able to pay their 2011 taxes in full by October, this can help make that payment process more affordable. The IRS won't waive interest, however, on the unpaid balance. Currently, the IRS charges interest at a rate of 3% annually.
The IRS is also making streamlined installment agreements available to more taxpayers. The benefit of a streamlined installment agreement is that the IRS won't file a federal tax lien, which can severely damage a taxpayer's credit ratings. Normally, streamlined installment agreements are available on outstanding balances of $25,000 or less for which the taxpayer agrees to pay off in 60 months or less. But under the Fresh Start Initiative, the IRS will approve streamlined payments plans on outstanding balances of $50,000 or less and for which the taxpayer agrees to pay off in 72 months or less.
Taxpayers with outstanding taxes owed to the IRS should review their financial situation with federally authorized tax practitioners, such as an enrolled agent, certified public accountant or an attorney. Tax professionals can analyze whether the streamlined installment agreement will be affordable and sustainable over the long-term, and can help analyze which payment programs offered by the IRS will be best suited for a taxpayer's unique situation.