Does the IRS Fresh Start Program Include State Taxes Too?

Key Takeaways  

• The IRS Fresh Start Program does not include state taxes. It only applies to federal tax liabilities administered by the Internal Revenue Service (IRS). 

• There is no nationwide fresh start program for state taxes. Individual states administer their own relief programs, which may include payment plans, settlement agreements, penalty abatements, and hardship assistance. 

• Some states offer tax settlement programs. California, New York, Oregon, Illinois, and Pennsylvania have state-specific options that may allow eligible taxpayers to settle certain tax liabilities for less than the full amount owed. 

• State tax relief eligibility varies. Agencies may evaluate outstanding balances, income, assets, living expenses, filing history, and ability to pay when reviewing applications. 

• Federal and state tax debts must be resolved separately. An IRS Offer in Compromise or installment agreement does not automatically settle state taxes or stop state collection actions. 

• Taxpayers can pursue federal and state relief simultaneously. Reviewing both liabilities, getting current on tax filings, and exploring available programs can help establish a manageable tax resolution strategy. 

If you owe back taxes to both the Internal Revenue Service (IRS) and your state, you may be wondering whether the IRS Fresh Start Program can help eliminate or reduce both balances. The IRS Fresh Start Program does not include state taxes. It is a federal tax relief initiative designed to help eligible taxpayers resolve outstanding federal tax liabilities through options such as installment agreements, Offers in Compromise, and certain penalty relief provisions. 

However, this does not mean you are out of options if you owe state taxes. Many states administer their own tax relief programs that may offer payment arrangements, settlement opportunities, penalty abatements, or temporary collection relief. Although there is no nationwide fresh start program for state taxes, some state programs provide relief similar to the IRS initiative. 

Understanding the difference between federal and state tax relief is important if you owe multiple tax authorities. Each agency has its own collection procedures, eligibility requirements, and application process. Knowing which options are available can help you develop a strategy for addressing both balances and avoiding additional collection problems. 

What Is the IRS Fresh Start Program? 

The IRS Fresh Start Program is an initiative that expanded access to federal tax relief options for individuals and businesses struggling to pay their tax liabilities. Introduced in 2011 and expanded in 2012, the initiative included changes to IRS collection policies intended to make it easier for qualifying taxpayers to repay or settle what they owe. Fresh Start was a set of policy changes rather than a program you enroll in, and the relief options it expanded remain part of IRS collection procedures today. 

Rather than being a single tax forgiveness program, Fresh Start encompasses several existing IRS relief options and collection policy changes. These options can help eligible taxpayers manage unpaid federal taxes, reduce certain penalties, or settle their liabilities for less than the full amount owed. 

What Tax Relief Options Are Available Through the IRS Fresh Start Program? 

The IRS Fresh Start Initiative is associated with several federal tax relief options. The most relevant include installment agreements, Offers in Compromise, penalty abatement, and certain federal tax lien relief provisions. 

• Installment Agreements: Eligible taxpayers can pay their federal tax liabilities over time through monthly payments. Certain streamlined agreements may be available without the extensive financial disclosures required for other arrangements. 

• Offer in Compromise (OIC): Qualifying taxpayers may settle their federal tax liabilities for less than the full amount owed when the IRS determines it cannot reasonably expect to collect the full balance. 

• Penalty Abatement: Taxpayers may qualify to have certain penalties removed if they meet the IRS requirements for first-time penalty abatement, reasonable cause, or another applicable relief provision. 

• Currently Not Collectible (CNC) Status: Taxpayers experiencing significant financial hardship may qualify for a temporary pause in certain IRS collection activities. The tax liability does not disappear, and interest and penalties may continue to accrue. 

• Federal Tax Lien Relief: Under Fresh Start, the IRS expanded the situations where it will withdraw a filed Notice of Federal Tax Lien. In general, taxpayers who owe $25,000 or less and enter a Direct Debit Installment Agreement may qualify to request a withdrawal after meeting IRS requirements. A withdrawal removes the public lien notice as though it was never filed. 

Not every taxpayer qualifies for every option. The IRS evaluates factors such as the amount owed, filing and payment compliance, income, expenses, assets, and overall ability to pay. 

How Does the IRS Fresh Start Program Help Taxpayers? 

The Fresh Start Initiative was designed to make federal tax collection more manageable for taxpayers experiencing financial difficulties. Depending on their circumstances, eligible individuals may be able to avoid certain collection actions, establish a more affordable repayment arrangement, or resolve their federal tax liabilities through a settlement. 

For example, consider a taxpayer who owes $18,000 in federal income taxes but cannot afford to pay the entire balance immediately. Rather than ignoring IRS notices and risking additional collection action, the taxpayer may qualify for an installment agreement that spreads repayment over time. If the taxpayer’s financial circumstances demonstrate that the IRS is unlikely to collect the full amount, an Offer in Compromise may also be worth evaluating. 

The important distinction is that Fresh Start does not automatically forgive tax liabilities. Taxpayers must meet the requirements of the specific relief option they pursue, and the IRS must approve their applications when approval is required. 

Does the IRS Fresh Start Program Include State Taxes? 

No. The IRS Fresh Start Program only applies to federal tax liabilities and cannot directly reduce, eliminate, or settle state taxes. State governments administer their own tax systems, meaning taxpayers must work with the appropriate state tax agency to resolve outstanding state tax balances. 

This distinction matters because federal and state tax obligations are separate. Even if the IRS approves an Offer in Compromise or installment agreement, that decision does not automatically change what a taxpayer owes their state. 

For example, someone who owes $12,000 to the IRS and $4,000 to their state may qualify for a federal settlement that reduces the amount owed to the IRS. However, the $4,000 state tax liability remains unless the state separately approves a payment arrangement, settlement, or other form of relief. 

What Is the Difference Between Federal and State Tax Relief? 

Federal and state tax relief programs serve similar purposes, but they operate under different laws and administrative systems. The IRS handles federal tax liabilities, while individual state agencies determine how their back taxes can be resolved. 

Category	Federal Tax Relief	State Tax Relief
Administered by	Internal Revenue Service (IRS)	Individual state tax agencies
Applicable taxes	Federal tax liabilities	State-administered tax liabilities
Payment plans	IRS installment agreements	State installment or payment agreements
Settlement options	Federal Offer in Compromise	State-specific compromise programs, where available
Penalty relief	IRS penalty abatement	State-specific penalty waivers or abatements
Financial hardship relief	Currently Not Collectible status	State-specific hardship or collection relief options
Eligibility	Federal IRS requirements	Requirements established by each state

One important difference is that state tax relief is not standardized nationwide. Some states have formal settlement programs, while others primarily offer installment agreements, penalty waivers, or limited hardship provisions. 

Why Doesn’t the IRS Handle State Back Taxes? 

The IRS is responsible for administering and enforcing federal tax laws. State tax agencies operate separately and enforce their own tax laws, including state income taxes, business taxes, sales taxes, and other applicable state obligations. 

Because these agencies have separate authority, the IRS cannot approve a state tax settlement or change a balance owed to a state government. 

For taxpayers with multiple outstanding tax liabilities, this means that resolving federal taxes and state taxes generally requires separate applications and negotiations. A federal tax relief approval should never be assumed to protect someone from state tax collection efforts. 

What State Tax Relief Programs Are Available? 

Although there is no single nationwide state tax fresh start relief program, many states offer their own programs to help taxpayers resolve unpaid state tax liabilities. These programs are administered by state departments of revenue, taxation, or other designated agencies. 

Depending on the state, taxpayers may qualify for installment agreements, Offers in Compromise, penalty abatements, or temporary hardship arrangements. However, the availability of each option depends on state law, the type of tax owed, and the taxpayer’s financial circumstances. 

State Tax Payment Plans 

State tax payment plans allow eligible taxpayers to repay outstanding tax liabilities through scheduled monthly payments instead of paying the entire balance at once. They are often one of the most accessible options for taxpayers who can afford to repay their tax liability over time but cannot make a lump-sum payment. 

Although payment plan requirements vary, states commonly consider: 

• The total amount of state taxes owed. 

• The taxpayer’s ability to make consistent monthly payments. 

• Whether all required state tax returns have been filed. 

• Whether the taxpayer is current on ongoing tax obligations. 

• Whether previous payment arrangements have been defaulted on. 

For example, the Oregon Department of Revenue offers payment plans of up to 36 months for qualifying taxpayers who cannot pay their state tax balances in full. Taxpayers can use the state’s Revenue Online system to establish a payment arrangement.  

A payment plan generally does not eliminate the underlying tax liability. Interest and applicable penalties may continue accruing while the taxpayer makes payments. Missing scheduled payments can also result in a default and additional collection activity. 

State Offer in Compromise and Tax Settlement Programs 

Some states offer their own Offer in Compromise programs, which allow qualifying taxpayers to settle certain state tax liabilities for less than the full amount owed. 

Similar to the federal IRS program, state compromise agreements generally consider whether the taxpayer has the financial ability to pay the full liability. However, each state establishes its own eligibility requirements, application procedures, and settlement criteria. 

For example: 

• California: The Franchise Tax Board (FTB) offers an Offer in Compromise program for taxpayers who cannot reasonably pay their full state income tax liabilities. Eligibility is based on factors such as income, assets, expenses, and ability to pay. The FTB evaluates its offers separately from offers submitted to the IRS or other agencies.  

• New York: The Department of Taxation and Finance offers an Offer in Compromise program for qualifying individuals and businesses. Eligibility may include insolvency, discharge in bankruptcy, or undue economic hardship for individuals.  

• California Department of Tax and Fee Administration (CDTFA): The CDTFA also administers a separate Offer in Compromise program for certain tax and fee liabilities. Eligibility generally requires that the taxpayer cannot pay the full balance within a reasonable period and does not dispute the amount owed. The program has mainly been available for closed accounts and for taxpayers who are no longer associated with the business that owes the liability, although some open businesses may qualify under a temporary expansion currently scheduled through January 1, 2028. 

These examples demonstrate that state tax settlement opportunities exist, but they are not identical to the IRS Fresh Start Initiative. Some programs apply only to specific tax types or circumstances, and approval is never guaranteed. 

Taxpayers should also understand that a state settlement generally does not resolve federal tax liabilities. If someone owes both federal and state taxes, separate agreements are necessary. 

State Tax Penalty Abatement and Waiver Programs 

State tax penalty abatement programs may allow eligible taxpayers to have certain penalties reduced or removed. These programs can be helpful when penalties have significantly increased an outstanding balance. 

Common reasons taxpayers may qualify for state penalty relief include: 

• Serious illness or medical emergencies. 

• Natural disasters or other unexpected events. 

• Financial hardship, in states that consider it as part of a reasonable cause request. 

• Circumstances beyond the taxpayer’s reasonable control. 

• Other qualifying reasons recognized by the state’s tax agency. 

For example, a taxpayer who missed a state tax filing deadline because of a documented medical emergency may be able to request penalty relief, depending on the state’s rules. 

It is important to distinguish between penalties and the underlying tax liability. Even if a state removes certain penalties, the taxpayer may still owe the original tax amount and any applicable interest. 

Each state has its own procedures for requesting relief. Some require a written explanation and supporting documentation, while others provide specific forms or online applications. 

State Tax Hardship Programs 

Some states offer hardship-based collection relief for taxpayers experiencing significant financial difficulties. These options may temporarily reduce collection pressure when individuals cannot afford to make payments without compromising essential living expenses. 

Depending on the state, hardship assistance may include: 

• Temporary collection holds. 

• Alternative payment arrangements. 

• Reduced payment amounts. 

• Financial hardship reviews. 

• Settlement opportunities for taxpayers who meet specific requirements. 

For instance, a taxpayer who recently lost their job may be unable to maintain an existing state tax payment arrangement. Depending on the state’s policies, the taxpayer may be able to request a review of their financial circumstances and negotiate a more manageable arrangement. 

However, hardship relief does not necessarily eliminate the tax liability. Interest and penalties may continue accruing, and collection activity may resume if the taxpayer’s financial situation improves or the arrangement expires. 

Which States Offer Tax Relief or Tax Forgiveness Programs? 

There is no universal state tax forgiveness program available nationwide. Instead, individual states determine which relief options they offer and who can qualify for them. 

Some states provide formal tax settlement programs, while others focus on payment plans, penalty waivers, and other collection arrangements. The following examples illustrate how state tax relief can differ. 

California Tax Relief Programs 

California taxpayers who owe state income taxes may be eligible for the Franchise Tax Board’s Offer in Compromise program. 

The program allows qualifying taxpayers to propose paying less than their outstanding tax liability. The FTB evaluates several financial factors, including: 

• Current and future income. 

• Available assets. 

• Allowable living expenses. 

• Ability to pay the outstanding balance. 

• Whether the proposed settlement is in the state’s best interest. 

Before applying, taxpayers generally must have filed all required income tax returns, agreed with the amount owed, and explored available payment options. 

California also administers separate tax collection programs through agencies such as the California Department of Tax and Fee Administration. These programs have different eligibility requirements and cover different types of state-administered taxes. 

Importantly, the FTB evaluates an Offer in Compromise independently from an offer submitted to the IRS. Receiving federal tax relief does not automatically qualify someone for California tax relief.   

New York Tax Relief Programs 

New York offers an Offer in Compromise program for financially distressed taxpayers who cannot reasonably resolve their outstanding state tax liabilities. 

Eligible individuals and businesses may qualify based on circumstances such as insolvency or bankruptcy discharge. Individuals may also qualify when paying the full liability would create undue economic hardship. 

The New York Department of Taxation and Finance reviews each application to determine whether the proposed settlement is appropriate and in the state’s interest. 

New York also offers payment arrangements for taxpayers who need additional time to pay outstanding state taxes. The appropriate option depends on the taxpayer’s balance, financial situation, and compliance history. 

Oregon Tax Relief Programs 

Oregon taxpayers who cannot pay their state tax balances in full may be able to establish payment plans through the Oregon Department of Revenue. 

The department offers payment plans of up to 36 months for eligible taxpayers, which can help individuals manage a balance without making one large payment. Individuals who owe more than they can realistically pay may also be able to apply for a settlement offer, which is Oregon’s version of an Offer in Compromise. Settlement offers are not available to business entities, and debt from an open business cannot be included. The department reviews each application based on the applicant’s ability to pay, and applicants must have filed all required Oregon tax returns before applying. A payment equal to 5 percent of the offer must be submitted with the application. Oregon may reach a different decision than the IRS on a similar request, so approval of one does not guarantee approval of the other. 

Oregon’s penalty and interest rules are separate from federal IRS rules. For example, receiving an extension to file a federal return does not automatically extend the deadline to pay Oregon income taxes. 

Other States With Tax Relief Options 

Other states also provide ways to address outstanding tax liabilities, although the available programs vary. 

For example, Illinois and Pennsylvania both offer payment arrangements for eligible taxpayers, and both also have limited Offer in Compromise programs. Illinois considers settlement requests through its Board of Appeals, and only when there is uncertainty about whether the state can collect the full balance. Pennsylvania may accept an offer when the Department of Revenue concludes it is unlikely to collect the full amount owed. Texas, which does not impose an individual state income tax, has payment arrangements for certain other state tax obligations administered by the Texas Comptroller. 

Taxpayers should not assume that a program available in one state will also be offered in another. The best starting point is the official website of the state’s department of revenue or taxation. 

How Do You Qualify for State Tax Relief? 

Eligibility for state tax relief depends on the specific program and the taxpayer’s financial circumstances. Unlike the federal Fresh Start Initiative, which follows IRS requirements, state tax relief programs are governed by individual state laws and administrative policies. 

Although the requirements vary, state agencies commonly evaluate several factors when reviewing applications. 

Outstanding State Tax Liability 

Most state tax relief programs require taxpayers to have an outstanding tax balance. The agency may review the amount owed, the tax years involved, and whether the liability has been formally assessed. Some programs require taxpayers to agree with the assessed amount before applying for a settlement. 

If you believe the state incorrectly calculated your tax liability, you may need to dispute the assessment rather than pursue a compromise agreement. 

This distinction is important because a tax settlement generally addresses an established liability; it is not necessarily a way to challenge whether the original assessment was correct. 

Financial Hardship and Ability to Pay 

Financial circumstances are particularly important for taxpayers applying for hardship assistance or an Offer in Compromise. 

State agencies may evaluate whether paying the full balance would create an unreasonable financial burden. Factors can include: 

• Monthly household income. 

• Essential living expenses. 

• Bank account balances. 

• Real estate and other property. 

• Investments and retirement accounts. 

• Outstanding loans and other financial obligations. 

For example, someone who earns $3,000 per month but spends most of that income on housing, utilities, food, transportation, and necessary medical expenses may have limited ability to pay a large state tax balance. 

The agency may use this information to determine whether the taxpayer qualifies for a reduced settlement, alternative payment arrangement, or another form of relief. 

Tax Filing and Compliance History 

Many state tax relief programs require applicants to be current with their filing obligations. This means taxpayers may need to submit missing state tax returns before their applications can be considered. Some programs also require individuals to remain current on estimated tax payments or other ongoing obligations. 

For example, someone who owes state income taxes for multiple years may need to file all missing returns before requesting an Offer in Compromise. 

Maintaining compliance is also important after receiving relief. Missing future filing deadlines or accumulating additional unpaid tax liabilities could jeopardize an existing agreement. 

Supporting Financial Documentation 

State agencies may require taxpayers to provide financial records to verify their income, expenses, assets, and overall ability to pay. 

Commonly requested documents include: 

• Recent federal and state tax returns. 

• Pay stubs or other proof of income. 

• Bank statements. 

• Mortgage or rent statements. 

• Utility bills and other household expenses. 

• Investment and retirement account statements. 

• Documentation of medical expenses or financial hardship. 

Providing complete and accurate information can help prevent delays and allow the agency to evaluate the application properly. 

How to Apply for Federal and State Tax Relief at the Same Time 

Taxpayers who owe both federal and state taxes may need to pursue separate relief applications with the IRS and their state’s tax agency. Although the processes are different, addressing both liabilities together can help prevent one unresolved balance from creating additional financial difficulties. The following steps can help taxpayers organize their federal and state tax relief efforts. 

1. Determine How Much You Owe in Federal and State Taxes  

Start by identifying all outstanding tax liabilities, including the tax years involved, unpaid balances, penalties, and accrued interest. For federal taxes, taxpayers can review their IRS Online Account or request account transcripts to understand their outstanding balances and payment history. 

For state taxes, contact the appropriate department of revenue or taxation to obtain an updated account statement. It is also important to identify whether either agency has initiated collection activity, such as filing a tax lien, issuing a levy notice, or garnishing wages. 

2. Get Current on Required Tax Filings  

Before applying for many tax relief programs, taxpayers must file all required federal and state tax returns. Unfiled returns can complicate the resolution process and may prevent taxpayers from qualifying for certain payment arrangements or settlement options. 

For example, someone who owes federal income taxes for three years and has not filed their most recent state return may need to address the missing filings before pursuing relief. Getting current on tax filings can also help establish a clearer picture of the total amount owed to each agency. 

3. Identify Which Relief Programs You May Qualify For 

Once all outstanding liabilities have been identified, evaluate the available relief options separately. 

For federal taxes, potential options may include: 

• IRS installment agreements. 

• Federal Offers in Compromise. 

• First-time penalty abatement or reasonable cause relief. 

• Currently Not Collectible status.  

For state taxes, potential options may include: 

• State installment agreements. 

• State Offers in Compromise, where available. 

• Penalty abatement. 

• Financial hardship arrangements.  

Eligibility for one program does not guarantee eligibility for another. A taxpayer may qualify for an IRS installment agreement but not a state settlement, or vice versa. 

4. Gather Financial Records and Submit Applications  

Many tax relief programs require financial information to determine how much a taxpayer can reasonably afford to pay. Gather relevant income statements, bank records, tax returns, expense documentation, and information about outstanding liabilities and assets. 

Submit the required applications to the appropriate agencies, following their individual instructions and deadlines. Taxpayers should review applications carefully before submitting them. Incomplete or inaccurate financial information can delay the process or result in a rejected request. 

5. Stay Compliant With Future Tax Obligations 

Receiving tax relief does not eliminate the responsibility to meet future filing and payment requirements. Taxpayers with installment agreements must generally make their scheduled payments on time. Those who receive an accepted Offer in Compromise must follow the agreement’s terms and maintain the required tax compliance. 

For example, if a taxpayer settles an IRS liability through an Offer in Compromise but fails to meet the agreement’s future filing and payment requirements, the IRS may default the agreement and reinstate the remaining liability. Maintaining compliance with both federal and state tax obligations is essential to protecting an approved resolution. 

How Optima Tax Relief Can Help 

Although the IRS Fresh Start Program does not cover state taxes, taxpayers struggling with federal tax liabilities may still have options for resolving what they owe. Optima Tax Relief helps eligible taxpayers explore federal tax resolution options based on their financial circumstances, outstanding balances, and current IRS collection status. Depending on the situation, potential solutions may include installment agreements, Offers in Compromise, and penalty abatement. 

If you owe both federal and state taxes, it is important to understand that each liability must be addressed separately. Optima Tax Relief can help you evaluate your federal tax relief options and work toward a manageable resolution with the IRS, while state tax liabilities must be handled through the appropriate state tax agency. 

Frequently Asked Questions 

Does the IRS Fresh Start Program Include State Taxes? 

No. The IRS Fresh Start Program only applies to federal tax liabilities and does not cover state taxes. Taxpayers must contact their state’s tax agency to explore separate payment plans, settlement programs, or penalty relief options. 

Can State Back Taxes Be Forgiven? 

In certain circumstances, yes. Some states offer settlement programs that allow qualifying taxpayers to pay less than their full state tax liabilities. Other states may provide penalty relief or temporary hardship assistance. 

Do All States Have a Tax Forgiveness Program? 

No. There is no nationwide state tax forgiveness program, and not every state offers a formal tax settlement option. Some states provide payment plans, penalty waivers, or hardship assistance instead. 

Tax Help for People Who Owe 

The IRS Fresh Start Program does not include state taxes because it is exclusively designed to address federal tax liabilities. However, taxpayers who owe state taxes may have access to separate relief options through their state’s department of revenue or taxation. 

Depending on the state and the taxpayer’s financial circumstances, these options may include installment agreements, Offers in Compromise, penalty abatements, and hardship arrangements. There is no universal fresh start program for state taxes, so taxpayers must review their state’s specific requirements. 

If you owe both federal and state taxes, remember that resolving one liability does not automatically resolve the other. Addressing both balances proactively, understanding your eligibility for available programs, and seeking professional guidance when necessary can help you work toward a more manageable financial situation. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.      

If You Need Tax Help, Contact Us Today for a Free Consultation.