Articles Posted in Back Taxes

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When you have a federal income tax refund, that refund may in some cases be used to pay other unpaid debts. The United States Treasury Offset Program contains the tax rules of how and when your refund will be used against a debt. The Treasury Offset Program can use a portion or all of your income tax refund to pay against your state or federal debt, and the program is administered by the Treasury Bureau of the Fiscal Service.

Tax-HelpThe types of debts that the tax refund can be used to offset are numerous. The types of tax debts include 1) federal tax debts (income taxes, trust fund recovery penalties, etc), 2) Federal agency debts such as federal student loans that are outstanding (not in payment plan status), 3) unpaid spousal or child support that were crated by court order, 4) unpaid State tax obligations (income and payroll taxes), 5) State unemployment debts, and 6) unpaid shared responsibility payments for health insurance.

The IRS will notify an affected taxpayer by mail when they are using the refund to pay a certain debt listed above, and the State has a similar program. The notice will tell you the refund that you would have received, and the amount of that refund that is being used to pay the debt. The notice will provide which agency (state or federal) that is administering the debt, and also provide their contact information in case the debt amount is incorrect or not yours. It is important to only contact the IRS if the debt relates to a debt related to them, in other cases you need to contact the agency that is administering the debt. When you are disputing the debt, it is very important to keep copies of the dispute letters that you send them, and follow up each letter with a phone call to make sure your request is being acted upon.

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If a taxpayer does not file an income tax return (IRS calls them non-filers), and the IRS deems that a tax return is due to be filed, the IRS will use the information it receives from third parties (employers, brokerage firms, mortgage lenders) and filed W/2 forms, Form 1099, Form 1098, and other similar income reporting forms, to prepare the missing tax return. The tax return is prepared by the substitute return group at the IRS, which is connected to the audit group. The tax return is called by the IRS a Substitute For Return (SFR).

tax-planning-300x263When the IRS prepares your tax return, they use the highest tax rate and do not include any tax credits you are entitled to. Therefore, the tax computed is higher than what it would have been if you prepared the tax return in most cases. They also treat married people as married filing separately, which also causes the tax rates to increase. They also exclude dependents, which causes a higher tax bill. 

When you don’t file an income tax return, there is no statute of limitations of when you or the IRS can file a tax return, or audit you. The typical rule is that the IRS can audit you for the last three years once you file a tax return, unless they find your income was materially under reported on a filed tax return and they can go back for the last six years. The IRS however, under the Internal Revenue Manual sections 412.1.3, says in general they will only prepare substitute income tax returns for the last six years. The six-year rule also agrees with the IRS policy for non-criminal cases of only looking for taxpayers to file for the last six years if they did not file for a longer period of time.

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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. a9-300x150

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.

 

 

 

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New Yorkers with tax obligations may feel a bit overwhelmed, especially if they are dealing with other forms of debt. However, they are not alone. A surprising group of individuals also face tax liabilities.

Federal employees reportedly owe the Internal Revenue Service more than $3.5 million for the 2011 tax year. More than 311,000 federal workers have tax debts.

The Treasury Department has the lowest percentage of employees who owe back taxes. The Department of Housing and Urban Development has one of the highest percentages of employees who owe money to the IRS.

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