Articles Posted in Back Taxes

When a taxpayer can not pay the IRS a lump sum payoff for their tax debt, they need to create a payment plan with the IRS. There are a number of options to consider when the payment plan is established. Obviously, it is almost always best to create the lowest monthly payment plan amount as possible and then pay more to get the balance down quickly, but not be at risk of defaulting the payment plan if money is tight. Therefore, there a number of factors to consider to get the correct balance of paying down the debt quickly, and not having a future issue. As with other payment plans that you might establish with a creditor, the amount you will pay will depend on the amount you owe, the amount you can afford to pay, and what assets and income you have.

As an overview, the IRS has many programs that allow for payments of taxes over time. The payment plans are within the discretion of the IRS, which means they decide the amount per month they will accept. Often it takes a lot of hard work to get the IRS to agree on an affordable number. The IRS does not give much flexibility with the monthly payment being late once the payment plan is established. In some rare instances, the payments can fluctuate if the person or business has seasonal income, or income on a non-recurring basis, such a lawyer who gets paid on contingency basis.

There are three common ways that you can make payments under the payment plan.

I often receive phone calls from prospective clients who have not filed their income tax returns (“unfiled tax returns”) for many years. The typical range of unfiled tax returns is about the last 5-7 years, but some cases it dates back to the mid 1990’s. Since I can barely remember what I did in the 1990’s, I am glad to tell you that the IRS and many states do not require you to file all the income tax returns that are due when you are trying to catch up on late filed returns. This is very good news since when you do not file a tax return, the statute of limitations never expires on unfiled tax returns. 

Typically, when I call the IRS, I negotiate with them and get them to agree to accept the last six years of filings to bring the client current with their tax filings. For New York State Tax Department, we can sometimes have them accept the last three years to become current. In some cases, New York State also forgives the penalties, so you just pay the taxes and interest under the New York State Voluntary disclosure program . This concept of forgiving the penalties, which can be as high as 50% of the tax balance, is something the Internal Revenue Service should consider, in my opinion, since it creates a huge amount of work for them to track down and collect the penalties and can result in hardship to the taxpayer.

The amount of taxes owed related to the unfiled tax returns can vary widely depending on whether the taxpayer was self employed or a wage earner. If the taxpayer was a wage earner, it also matters whether their wage allowances were close to what they needed to be. If a taxpayer was self employed, they will incur the normal income taxes, which are roughly 25% for the IRS, and 10% for NYS, as well as an additional 15% for social security taxes. Therefore, the total taxes can be about 40% on the income earned.  For a wage earner (a person who receives a W-2), if their withholding’s were fairly reasonable, there should not be a huge tax bill since the taxes were paid during the tax year in question. Once the tax amount is computed, and penalties negotiated downward, the remaining tax debt can be paid off either through an installment agreement or offer in compromise for the debt related to the unfiled tax returns. Typically, the terms of the payment plan can be three to eight years.