Articles Posted in Tax Payment Plans

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Tax Relief: If you owe the IRS taxes and presently are unable to make a payment in full to satisfy the debt and you have either assets or regular income to make good on your debt, you may very well be able to arrange an installment agreement of some form with the IRS. This page discusses the various types of tax relief installment agreements can provide and the conditions under which you may be qualified to obtain this form of IRS relief.

There are 3 main steps to set up an IRS installment agreement, each with its own special considerations:

Step 1: Before you can establish an IRS installment agreement:  First, file all your past tax returns

In the event that you are in tough financial times that makes it difficult to pay your tax obligations, and this fact can be verified to the IRS that collecting from you will generate a monetary hardship, the IRS will place your tax account with them into a noncollectable position known by the IRS as conditionally “currently not collectible”. This status could be granted to both people and business corporations. Generally, this classification will be reexamined in one to two years to see if your finances have changed and you are collectable. Through the entire time that your accounts is deemed noncollectable, the IRS will not levy you or ask for payments. Most states do not follow this same rule, unfortunately.

a10-300x300In nearly all taxpayer situations, the IRS collects economic information of your noncollectable position simply by causing the taxpayer two complete comprehensive forms, which are forms 433-A, 433-B, and 433-F, that are used to verify your income and assets and your financial ability to pay your back taxes. These forms are actually challenging to complete properly since you wish to provide correct information used by the Internal Revenue Service to factor your ability to pay, while also making sure the payment plan is not to high in amount and you default it.  The factors the IRS considers is s persons age group, education level, their employment position, the cost of residing in the region of the country the taxpayer lives, medical problems, to name a small number of items they review. The IRS income uses countrywide and regional standards, consequently deviations from the standardized amounts have to be validated for every case.

The IRS defines financial hardship in perhaps a means that you’ll would not. If you don’t have any belongings, as well as your income is actually simply only plenty enough to cover your simple bills there is usually an excellent chance the IRS wouldn’t normally view your income as being a good levy source to focus on and you’d be deemed currently not really collectible “CNC”. For those who have belongings, or middle/high income, this will be more challenging to prove this position although having possessions or retirement assets may not result in not obtaining this status.  However, if the IRS recognizes you to be noncollectable, and you incur a fresh taxes debt, they will start collection activity again.

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.

a10-300x300As 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.

Once you owe taxes to the IRS, they have very specific criteria of what expenses they will allow over the long term when they determine how much they will ask you to pay back per month to repay the debt. To understand the process the IRS uses, it is important to realize they are trying to collect as mush as possible from you, and it does not always matter how much you can afford to pay. From the taxpayers perspective, the goal is to reach a payment plan that from a monetary perspective allows you to live your life in a reasonable manner, and pay down the debt as quickly as possible without incurring unbearable stress.

Tax-HelpOverall, the starting point to determine the amount of your monthly income you can pay each month is determined by the IRS by having you complete either a 433-A, 433-B or 433-F form. These forms are used by individual and business taxpayers. Completing these forms can be very tricky since the IRS does not explain their use in a clear fashion, and often if you just fill them out in good faith you will end up paying them a lot more per month than you can afford. When this happens, most people stop paying their current taxes correctly and the tax issue snowballs into a complete mess.

The IRS national standards for food, and misc. expenses, such as clothing are consistent across the country so that presents a practical problem if you live in an area of the country where the living expenses are high (for instance the metro NY area). There has also established national standards for vehicle expenses, out of pocket health care, and housing. For housing expenses, the IRS does refine the calculation to the state and county level, but in many cases that amount is less than the average person spends for housing. Since it is not easy in most cases to change your housing costs, this is an issue that is not easy to solve. If your costs are within the standard amount, the IRS will not question the expenses so you do not need to prove you paid it.

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.

I often receive phone calls from prospective clients who have not filed their income tax returns for many years. The typical range of unfiled income 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. 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 withholdings 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. Typically, the terms of the payment plan can be three to eight years.

 

 

 

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Under the newly enacted legislation, the Fixing America’s Surface Transportation Act,  a provision was included that allows the IRS to outsource the collection of tax debts under some circumstances to private debt collection firms. Anyone who has dealt with a private debt collection firm can understand why I think this is a bad idea, manly because such firms sole goal is to collect money, and other circumstances (loss of job, age, sickness, etc.) could be at play and discretion is required. Even the IRS’s own taxpayer advocate was against the idea of using private collection companies. You can read her letter here.

The use of private collection companies will follow a procedure of where they will typically contact the taxpayer by mail and try to establish a payment plan. From my experience, most people being pressured with a collection company will agree to a much higher monthly payment than what they can afford. These plans will then default due to missed payments and then its back to the collection firm to handle once again. Hopefully, the IRS limits the use of this collection tactic so as to not harm the public from over zealous tax collectors, and collects a fair amount through thoughtful collection means.

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Starting January 1, 2016, the Internal Revenue Service will be given the power under new legislation to deny, rescind, or limit a passport of anyone who owes the IRS more than $50,000. This threshold amount includes both taxes, interest and penalties. From a practical perspective, this threshold dollar amount is not  difficult to amass for the average self-employed taxpayer who can have tax rates close to 50% once social security taxes are factored in, or individuals with significant income. From my perspective, if the law was limited to criminal matters, it would make more sense.

The good news, is that the IRS will not rescind or hinder the ability of an individual to have a passport where 1) that individual has entered into an installment agreement with the IRS to pay the back taxes, 2) for humanitarian reasons, or 3) if the taxpayer is contesting the tax liability in Court or an administrative proceeding.  This new legislation will be under section 7345 of the tax code, called “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.”

While different from New York States revocation of a taxpayers drivers license if they owe NYS taxes, it is very troubling nonetheless in that it restricts the ability to travel (or in NY’s case simply drive) which can directly impact a persons ability to generate income to pay for their tax obligation. I doubt this legislation will cause delinquent tax collections to rise dramatically, and may have the unfortunate impact of hurting taxpayers who are already hurting economically.

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Denial, avoidance and procrastination are all activities in which an individual may engage when faced with something that he or she would rather not deal with or do. However, such coping tactics are almost always sure to backfire and make an unpleasant or difficult situation even worse. This is especially true in cases where an individual receives communication from the Internal Revenue Service.

Anyone who opens their mailbox and sees a letter from the IRS is likely to panic. Whether an individual chooses to throw the sealed envelope away or simply disregard its message, ignoring the IRS can end up costing an individual hundreds to thousands of dollars in fines and, in some cases, a whole lot more.

Annually, the IRS claims to send “millions of notices and letters to taxpayers for a variety of reasons,” some of which may be minor or even positive in nature. Even in cases where an individual knows that he or she failed to file or pay taxes or expects bad news, it’s important toopen an IRS letter or notice as soon as possible and to contact the agency with any questions. This is especially true in cases where an individual believes that the IRS erred and an individual plans to dispute the issue in question.

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Did you let Tax Day come and go without filing a return or paying what you owe to the IRS? If so, you are certainly not alone, but that doesn’t make the consequences that you face any less serious.

Chances are that you didn’t file a tax return because you can’t afford to pay the money that you owe. Maybe you don’t even know how much you will owe, you just know that you can’t afford to pay the IRS anything.

Or maybe this isn’t the first time you have avoided filing a tax return, and you got away with it in the past so you figured you would just try to avoid paying again this year.

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