Typhoons, Tourism Downturns, and Tax Relief: A Guide to the IRS Fresh Start Program

Finding relief from tax debt is a critical step in protecting your financial future. For many taxpayers across the CNMI and Guam, the IRS Offer in Compromise (Offer), commonly referred to as the "Fresh Start Program," often represents the only viable path to permanent relief from past due federal tax obligations.

Before diving into the mechanics of the program, two important jurisdictional points bear emphasis. First, both the CNMI and Guam operate under mirror tax codes that fully adopt the Internal Revenue Code as the basis for local income taxation. This means that the same framework governing compromise of federal income tax liabilities, including the four Offer pathways described below, also applies to locally assessed income taxes, the associated penalties, and interest. Taxpayers facing both federal and local income tax liabilities may have resolution options on both fronts.

Federal Insurance Contributions Act (FICA) taxes and Self-Employment (SE) taxes are among the most common sources of federal tax debt in the CNMI and Guam, a reality that has intensified in the post-pandemic economic downturn as businesses struggled with reduced revenue. An Offer can include these unpaid FICA and SE tax liabilities, making the Fresh Start Program a critical tool for self-employed individuals throughout the region.

An Offer allows you to settle your tax debt with the IRS for less than the full amount owed. The IRS will accept an Offer when it determines that certain factors are satisfied. There are four primary pathways:

I. Doubt as to Collectibility (DATC): “I simply cannot pay the full amount now or in the foreseeable future.”

II. Doubt as to Collectibility with Special Circumstances (DATC-SC): “On paper, it looks like I can pay, but I actually cannot because of a severe life event.”

III. Doubt as to Liability (DATL): “I do not believe I actually owe this tax because the assessment is incorrect.”

IV. Effective Tax Administration (ETA): “I owe the debt and ‘technically’ have the assets to pay it, but doing so would create an absolute catastrophe or exceptional economic hardship.”

Doubt as to Collectibility (DATC): The Ability to Pay

DATC is the primary path for a taxpayer whose financial reach falls short of the liability assessed against them. The IRS evaluates these Offers by calculating your “Reasonable Collection Potential” (RCP), the total amount the IRS believes it can realistically recover through all available means. The IRS considers two main components: your net realizable equity in assets and your future income potential.

Asset values are discounted to quick-sale value, typically 80% of fair market value. The IRS calculates your monthly disposable income by subtracting your allowable living expenses from your gross monthly income. Your Offer amount must meet or exceed the total RCP to be accepted.

Example:

Consider a 48-year-old owner of a small dive tour operation on Saipan who owes $94,000 in unpaid self-employment taxes accumulated over several years. When Typhoon Yutu made landfall in October 2018, it destroyed his business entirely, including vessels, equipment, and the waterfront structure from which he operated. He spent the years that followed rebuilding from the ground up, depleting his savings and taking on debt. Then, COVID-19 pummeled the CNMI’s tourism industry into a downward spiral never seen before.

By the time the IRS notices began in 2024, his rebuilt operation is modest: the IRS values his single refurbished vessel at a quick-sale value of $22,400, and after subtracting his remaining $18,000 equipment loan, there is a net of $4,400 in asset equity. His checking account balance brings total net asset equity to $6,200. On the income side, his monthly disposable income is just $390 after accounting for his reasonable living expenses. An Offer based on his RCP, supported by Form 433-A (OIC) with bank statements, business records, and documentation of the typhoon loss and subsequent reconstruction, can offer a binding resolution to the $94,000 liability.

Doubt as to Collectibility with Special Circumstances (DATC-SC)

There are instances where a taxpayer's financial picture appears healthy on paper, but full collection is nevertheless impossible. DATC-SC allows you to argue for a departure from the standard RCP formula due to verifiable, life-altering circumstances. When addressing individual tax debts, the IRS is expressly directed to give full consideration to the taxpayer's age, health, marital status, number and age of dependents, level of education or occupational training, work experience, and present and future employment status when assessing whether special circumstances warrant acceptance of a lesser amount.

These are not subjective considerations; they are the precise factors the IRS is required to weigh, and a well-built DATC Offer marshals documented evidence against each relevant factor to justify the departure from the standard formula.

Example:

Consider a 44-year-old self-employed tour guide and activity coordinator on Guam who owes $72,000 in unpaid self-employment taxes. Her livelihood depends on visitor arrivals, and the near-total collapse of tourism following the COVID-19 pandemic devastated her income for years. Under the standard DATC formula, her RCP calculates to approximately $68,000, close enough to the full balance that a standard Offer provides little meaningful relief.

In the midst of this economic recovery, she was diagnosed with a serious medical condition requiring specialized treatment unavailable on island. She now travels periodically to the Philippines and Japan for treatment, incurring out-of-pocket medical costs of $2,800 per month in specialist consultations, medications, and travel, which the IRS's allowable expenses do not capture.

Under DATC-SC, two enumerated special circumstance factors apply directly: her health condition and its material impact on her future employment capacity in an industry that has not fully recovered. Once the $2,800 in verified monthly medical expenses is deducted from her disposable income calculation, her adjusted RCP drops substantially, potentially to $25,000 or less, and an Offer in that range becomes legally supportable.

The key is documentation: physician records, treatment itineraries, documentation from foreign medical providers, and evidence of payment must accompany the submission to establish that the special circumstances are real, ongoing, and material to the income calculation.

Effective Tax Administration (ETA): Equity and Hardship

An ETA Offer is unique because it applies even when there is no doubt that you can pay the full amount. This pathway authorizes a compromise if full collection would create exceptional economic hardship or be contrary to equity and good conscience. ETA Offers are rare, accounting for approximately 2% of all Offers submitted to the IRS. It is important to note that the IRS cannot consider an ETA Offer if the taxpayer qualifies for DATC, DATC-SC, or DATL. ETA is a true last resort, available only when no other Offer basis applies.

The analysis for individuals under an ETA Offer focuses on their ability to meet basic living expenses. Under the applicable IRS rules, the economic hardship standard is satisfied when requiring full payment would leave the taxpayer unable to meet basic living expenses.

Business entities cannot claim “economic hardship,” unlike individuals. Businesses must pursue ETA on “public policy or equity” grounds under the applicable IRS rules, which permit compromise where requiring full payment would undermine public confidence that the tax laws are being administered in a fair and equitable manner.

Example:

The IRS issued informal guidance indicating that certain employee benefit contributions made through a specific plan structure were deductible under existing Treasury regulations, and a 40-employee staffing company restructured its benefits program in reliance on that guidance, claiming $180,000 in deductions over two tax years.

In 2022, Treasury formally withdrew the underlying regulatory proposal, determining it had never been finalized, and the IRS assessed $215,000 in tax, penalties, and interest against the company. The company is solvent and could pay; a DATC analysis produces no viable argument. However, requiring full payment from a taxpayer who acted in documented, reasonable reliance on IRS-published guidance and structured its business accordingly would undermine public confidence that the tax laws are being administered fairly.

An ETA Offer on public policy grounds, supported by the original guidance documents, the plan restructuring records, and a legal memorandum establishing the reliance argument, presents an appropriate path to resolution.

Doubt as to Liability (DATL): Challenging the Debt

DATL is the only Offer type that does not focus on your financial circumstances; it focuses entirely on whether the tax was correctly assessed. A DATL Offer does not require the typical financial disclosure forms; instead, it requires a robust written statement and supporting evidence to identify exactly why the assessment was incorrect.

Example:

A 39-year-old teacher receives a CP2000 notice proposing $18,400 in additional tax and $3,680 in penalties, based on $60,000 in wages the IRS believes he failed to report. A W-2 from a technology staffing firm was filed under a Social Security number that differs from his by a single transposed digit; he never worked for that company, and his actual W-2s from his real employer were correctly reported on his original return.

A DATL Offer is appropriate here because the assessment is predicated on income that was never attributable to this taxpayer. The Form 656-L submission requires no financial disclosure; instead, it demands a written statement identifying the error, a copy of the misfiled W-2, his verified W-2s, and documentation confirming no employment relationship with the staffing firm. Because the underlying liability is incorrect, the path to resolution runs through the accuracy of the assessment itself, not through the taxpayer's bank account.

Pursuing Your Fresh Start

The IRS Fresh Start Program serves as a vital safety net, but it requires strict compliance to succeed. Before the IRS will even consider an Offer, every required tax return must be filed, including returns for years not covered by the Offer, and all required estimated tax payments for the current year must be current. An Offer submitted while a return remains unfiled will be returned without consideration. If these requirements are not strictly followed during the review period, the Offer will be automatically rejected.

For those with unpaid payroll taxes, a distinct layer of exposure also warrants attention. When a business fails to remit payroll taxes, the IRS may separately assess the Trust Fund Recovery Penalty (TFRP) against the individual officers, owners, or employees who were responsible for collecting and remitting those taxes. The TFRP is a personal liability equal to 100% of the unpaid trust fund portion of the debt, meaning the same underlying unpaid tax can generate both a business liability and an individual personal liability assessed against the people who had control over collecting and remitting payroll taxes. An Offer submitted by the business entity does not resolve the separately assessed TFRP liability against the individual. Each liable party must address their own exposure independently, and coordination between those submissions is essential.

Accepting an Offer is not the end of the process; it is the beginning of a five-year compliance period that is just as consequential as the Offer itself. Once the IRS accepts your Offer, you are contractually obligated to file all required tax returns on time and pay all taxes in full for the five years following the acceptance date, including the year of acceptance. If you fail to meet any of these obligations during the compliance window, the IRS has the right to default the agreement and reinstate the entire original tax liability, minus any payments already made. The IRS will also retain any refund you would otherwise have been entitled to receive for the year in which the Offer is accepted.

The complete Offer review process can take anywhere from 6 to 24 months, depending on inventory levels and case complexity. During this period, the IRS typically suspends most collection activities, provided you remain current on your ongoing tax obligations. Exceptions apply, including refund offsets, and the possibility of a Notice of Federal Tax Lien being filed. However, the IRS will not levy or garnish you during this time, nor will they certify your U.S. Passport for suspension or revocation.

The IRS's acceptance rate has averaged approximately one in three Offers over the past decade, though it fluctuates significantly year to year, underscoring why professional representation by a tax attorney who understands the intricacies of the IRM is a critical investment.

If you are a resident of the CNMI or Guam dealing with unpaid self-employment taxes, FICA obligations, or other federal tax liabilities, or local income tax liabilities, the Fresh Start Program may offer a meaningful path forward. Curious whether an Offer is right for your situation? Contact us at Info@AzarvandTaxLaw.com or visit AzarvandTaxLaw.com to schedule a free 30-minute consultation.

Tina Azarvand, Esq., LL.M. resides on Saipan and is the Managing Partner of Azarvand Tax Law, a Maryland-based firm that represents clients worldwide before the IRS in tax controversies and provides proactive tax planning support to businesses throughout the CNMI and Guam.

This column is for informational purposes only and does not constitute legal advice.