“Fresh Start”: Penalty Relief

Today the IRS announced it will be offering additional tax relief to struggling taxpayers under its Fresh Start initiative. One of the ways the IRS plans to help out taxpayers is by granting penalty relief for the unemployed.  Another way is by expanding the Streamlined Installment Agreement (SIA) program.  Today I will describe the penalty relief provisions and tomorrow I will discuss the changes to the SIA criteria.

Taxpayers who meet the criteria for Fresh Start penalty relief will be given a 6-month grace period on the failure-to-pay penalties for 2011 taxes.  So, what are the criteria?  There are several:

  • You must have been unemployed at least 30 consecutive days sometime during the period January 1, 2011 to April 17, 2012.
  • Self-employed taxpayers must have experienced a 25% or greater reduction in income compared to 2010 due to the economic downturn
  • Your adjusted gross income must be less than $100,000 (or less than $200,000 if married filing jointly)
  • The balance due on your 2011 tax return must be $50,000 or less.
  • You must pay the entire tax debt (including any tax, interest, and other applicable penalties) by the end of the grace period, which is October 15, 2012, otherwise a failure-to-pay penalty will be imposed and calculated from the original payment due date, April 15, 2012
  • You must complete a Form 1127A to request this type of penalty relief

See article in the IRS Newsroom for more details.

As I read through the terms and conditions of the new Form 1127A, I couldn’t help but notice that struggling self-employeds are held to a slightly different standard than the unemployed. What’s worse, earning 25% less for an entire year, or being completely unemployed for 30 days or more?  Clearly if its only 30 or 60 days of unemployment, then its worse to earn 25% less; therefore, the self-employed standard would appear to be higher.  Furthermore, the 25% reduction must be due to the economic downturn, but there is no similar requirement that the 30+ day period of unemployment also be due to the economy.  It appears that it may be easier for the unemployed to obtain 1127A penalty relief than for the self-employed, even though a self-employed who experiences a 25% reduction in income might find himself in worse shape financially.