Cross References
• IR-2012-31

The IRS recently announced a major expansion of its Fresh Start initiative to help struggling taxpayers by taking steps to provide new penalty relief to the unemployed and making installment agreements available to more people.

Under the new Fresh Start provisions, certain taxpayers who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties. In addition, the IRS is doubling the dollar threshold for taxpayers eligible for installment agreements to help more people qualify for the program.

“We have an obligation to work with taxpayers who are struggling to make ends meet,” said IRS Commissioner Doug Shulman. “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.”

Penalty Relief. The IRS announced plans for new penalty relief for the unemployed on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties will be 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 will be 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 this year.
• Self-employed individuals who experienced a 25% or greater reduction in business income in 2011 due to the economy.

This 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.

Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, to seek the 2011 penalty relief.

The failure-to-pay penalty is generally half of 1% per month with an upper limit of 25%. Under this new relief, taxpayers can avoid that penalty until October 15, 2012, which is six months beyond this year’s filing deadline. 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% on an annual basis.

Even with the new penalty relief becoming available, the IRS strongly encourages taxpayers to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5% per month, also with a 25% cap.

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