IRS Offers Back Tax Help to Struggling Taxpayers

The dark back tax cloud got a bit of a silver lining earlier this month when the IRS announced it was expanding its ‘Fresh Start’ initiative to alleviate the back tax burden on unemployed and self-employed taxpayers who have been hit hard by the sluggish economy.

The agency is reducing failure-to-pay penalties for these taxpayers as well as doubling the back tax debt threshold that allows taxpayers to qualify easily for an installment plan of repayment.

The changes, however, will affect only two narrow groups of taxpayers:

  • Wage earners who were unemployed for at least thirty consecutive days during 2011 or the 2012 tax season, and
  • Self-employed individuals whose business income suffered at least a 25% decrease in 2011.

For penalty relief, the IRS will offer a six month grace period from failure-to-pay penalties on 2011 back taxes. The grace period ends on October 15, 2012 – the same date on which tax returns with an extension are due. If the tax debt is not paid in full by then, including all other penalties and interest, failure-to-pay penalties with begin to accumulate.

As with most IRS rules, income limits apply. No single tax filer with an income over $100,000, or married couple with an income over $200,000, can take advantage of the grace period. Nor can those whose tax bill exceeds $50,000.

Note, however, that interest charges, which the IRS cannot waive, will still accumulate on unpaid taxes at a rate of 3%. And if you don’t file or request an extension by the April 17 deadline you will still be subject to the failure-to-file penalty, which is even more severe than the failure-to-pay penalty.

The other half of the good news is that the IRS is doubling the limit on easy installment agreements. Now taxpayers who owe up to $50,000 of back taxes can enter into a streamlined installment agreement without having to furnish the IRS with a financial statement. Plus the maximum time over which back tax debt can be paid has been raised from 60 months to 72.

Doug Shulman, the IRS Commissioner, had this to say of the changes:

“We have an obligation to work with taxpayers who are struggling to make ends meet. This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers.”

Often accused of being an unfeeling bureaucracy of tax persecution, the IRS can be fairly accommodating to those in need and will work with good-intentioned taxpayers to find an equitable solution to their back tax problems.

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