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Thursday, March 8, 2012

IRS Offers Limited Penalty Relief, Enhances Installment Agreements for Financially Struggling Taxpayers

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 The IRS announced in IR-2012-31 (3/7/12) an expansion of its “Fresh Start” initiative to help struggling taxpayers by providing penalty relief to the unemployed and to make installment agreements available to more taxpayers.

Limited Penalty Relief. Taxpayers who fail to pay their entire balance due by the traditional April 15 deadline are subject to a failure-to-pay penalty under §6651 that generally equals .05% per month with an upper limit of 25% of the total tax. The IRS’s announcement provides a six-month grace period for the penalty for tax year 2011 returns, but only if the tax, interest and any other penalties are fully paid by October 15, 2012. Interest on any balance due that is not paid by April 15 (currently 3%) will continue to be charged until the balance is fully paid.


The penalty relief is limited 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 filing deadline.
  • self-employed individuals who experienced a 25% or greater reduction in business income in 2011 (relative to 2010) due to the economy.
The penalty relief is subject to income limits. A taxpayer’s adjusted gross income must not exceed $200,000 if married filing jointly or $100,000 if the taxpayer files single or as head of household. Also, the penalty relief is restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers meeting the above eligibility criteria must file Form 1127-A, Application of Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, which is available on the IRS’s website at www.irs.gov.

Taxpayers who cannot file their return by the April 17, 2012 deadline should file an extension request on Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, as the §6651 late filing penalty (generally 5% per month with an 25% cap of the total tax) remains in effect.

Improved Installment Agreements. Effective immediately, the IRS raised the threshold for using a “streamlined” installment agreement without providing the IRS with a Form 433-A, Collection Information Statement, from $25,000 to $50,000, i.e., taxpayers that owe up to $50,000 in back taxes (including penalties and interest) may use the easier process. In addition, the IRS increased the maximum term for streamlined installment agreements from 60 months to 72 months.

Taxpayers can set up an installment agreement by going to the On-line Payment Agreement (OPA) page on the IRS’s website atwww.irs.gov.

Kenneth S. Savell, J.D. LL.M (Tax)
IRS Practice and Procedure Group
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