Penalty Relief for the Unemployed Under Expanded “Fresh Start” Initiative

From the IRS

The IRS announced an expanded “Fresh Start” initiative March 7 to help struggling taxpayers with a number of measures for relief (IR-2012-31). One of the most noteworthy of these is the abatement for the 2011 tax year of the failure-to-pay penalty (0.5% per month of the tax due up to a maximum of 25%) until Oct. 15, 2012, provided the tax, interest, and any other penalties due are paid by that date. The IRS cautions that taxpayers who qualify should still have filed their 2011 returns by April 17, 2012, or file for an extension to Oct. 15, 2012, because failure-to-file penalties are not being waived.

Taxpayers who qualify for this penalty relief include:

• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17, 2012, filing deadline.
• Self-employed people who, in 2011, experienced a 25% or greater reduction in business income due to the economy.

The penalty relief is available to taxpayers whose income does not exceed $200,000 for married filing jointly or $100,000 for single or head-of-household filers, and it cannot be used by taxpayers who owe more than $50,000. New Form 1127-A, Application of Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, must also be filed to qualify for relief. Although the IRS frequently provides penalty relief to victims of disasters, offering relief across the board to both unemployed taxpayers and the self-employed who have suffered reduced incomes is unprecedented.

In the same announcement, the IRS said it is doubling the dollar threshold for tax balance due amounts that qualify for the streamlined installment agreement program. Effective immediately, the threshold for taxpayers using an installment agreement without supplying the IRS with a financial statement (Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-F, Collection Information Statement) is raised from $25,000 to $50,000 (which was itself raised from $10,000 to $25,000 in the first Fresh Start initiative (IR-2011-20)). The maximum term for streamlined payment agreements was also raised from five years to six years. The IRS emphasized that taxpayers can set up an installment agreement by going to the online payment agreement page at the IRS website and following the instructions.

The IRS also noted that it liberalized its rules for offers-in-compromise in the earlier round of Fresh Start, which also reformed the rules for tax liens.