Fresh Start Tax Relief Deadline Looms

The Tax Penalty Relief provisions of the Internal Revenue Service’s (IRS) Fresh Start Tax Relief programs announced earlier this year, have a crucial deadline of October 15, 2012, next Monday. The IRS announced earlier in the year new penalty relief for the unemployed on failure-to-pay penalties, which are one of the biggest penalties a financially distressed taxpayer faces on an IRS tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties was made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012.

The penalty relief is available to two categories of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return earlier this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This specific penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until next Monday, October 15, 2012. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

“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.