About 16 million individual taxpayers owe back taxes to the IRS. If left unresolved, unpaid taxes can bring headaches to taxpayers and their tax professionals. Taxpayers who owe back taxes are likely to experience held or offset refunds and mounting penalties. Even worse, taxpayers can face Internal Revenue Service enforcement through streams of collection notices and enforcement action such as liens, levies, and passport restrictions.
Taxpayers with unpaid taxes need a plan — and the best time to execute the plan is during tax season. Why? In order to get in good standing with the IRS for back taxes, taxpayers must be in both filing and payment compliance. For those who owe and cannot pay each year, tax filing season is the easiest time of the year to get back into both filing and payment compliance with the IRS and to get into an agreement with the IRS that will break the noncompliance cycle.
Filing compliance requires that the taxpayer has filed all required past returns. Taxpayers who are not in filing compliance cannot enter into an agreement with the IRS on their tax debts. IRS policy states that filing compliance is met if the taxpayer files a tax return for the current year and the past six years. For example, taxpayers are currently considered compliant if they have filed 2012-2017 (the past six years) and the current 2018 tax year by its due date.
Tax filing season offers tax professionals the perfect opportunity to address unfiled returns and get in the position to stop future noncompliance. Taxpayers who will continue to owe for 2018 should not procrastinate and incur additional penalties. It is critical for balance-due taxpayers to file on time to avoid a very costly failure-to-file penalty in addition to the taxes owed.
Payment compliance is easier earlier in the year
Once filed, the second requirement is for the taxpayer to be in payment compliance. Payment compliance is defined as having adequate withholding and/or estimated tax payments so that the taxpayer does not owe again in the future. Payment compliance is easiest to achieve in the first part of the year because the taxpayer can make the first quarter of required estimated tax payments or change their withholding so that they will not owe for the following year.
It is often very difficult for taxpayers to catch up on estimated tax payments or withholding later in the year. Taxpayers often cannot make up overdue estimated tax payments or adjust withholding later in the year to make sure that they do not owe at the end of the year.
Once the taxpayer is in filing and payment compliance, they can get into good standing with the IRS and avoid IRS enforcement by getting into one of the many collection options offered by the IRS. These options include payment plans, hardship status (called currently not collectible), or in some cases a tax settlement called an offer in compromise.
Payment compliance is not just an IRS requirement. If a taxpayer is in payment compliance, they can stop the root cause of their tax problem and avoid year-after-year issues with the IRS as a result of filing a new tax return with an unpaid balance owed. New unpaid balances default prior IRS agreements and bring the taxpayer back under scrutiny of the IRS — angrier than ever because of the taxpayer’s continuous non-compliance.
An illustration
Tax filing season is a great time for tax debtors to resolve their problems. It is easier for them to file back returns with their current year return. It is also the least expensive time to get back into payment compliance. Let’s look at a typical repeat tax debtor situation to illustrate:
The facts: John has a day job as an electrician. He also drives for Uber at night. He owes the IRS $22,000 in back taxes from 2015, 2016 and 2017. John owes every year because he has not increased his withholding on his day job or made estimated taxes to offset the $12,000 a year he makes as an Uber driver. John is about to file his 2018 return and owe $6,000 in additional taxes, mostly caused by his Uber earnings. John has an unfiled return for 2014 on which he believes he will also owe. John has contacted the IRS on several occasions to make arrangements on the amount he owes. However, the IRS will not let John into a payment arrangement (called an installment agreement) because he has not filed his 2014 return (not in filing compliance) and will owe again for 2018 — and likely for 2019 in the following year (not in payment compliance).
The plan: John contemplates his options — he sees no way to stop the continuous cycle of noncompliance. He has no funds to pay the 2018 balance and make payments for the current year so he does not owe again. Here is the best option for John:
- Get into filing compliance: John needs to file 2014 and 2018 immediately. Add the amount owed to the current balance of $22,000. All required returns will be filed, and John will be filing compliant.
- Get into payment compliance: Rather than pay the 2018 return balance that will cause him to not have enough funds to make estimated tax payments so he will not owe in 2019, John should focus his limited resources on making an estimated tax payment for the first quarter of 2019. John can get into an installment agreement that includes the 2018 balance owed. By focusing on future payment compliance, John will stop his pattern of repeat file/owe and avoid inevitable future default of his installment agreement. Most importantly, because John is in the first quarter of 2019, he will only need to make his first estimated tax payment to be in payment compliance with the IRS. Obviously, John will need to continue making payments in the subsequent three quarters to make sure he will not owe at the end of the year.
- Get into an agreement with the IRS on the balances owed: With filing and payment compliance solved, John will be in a position to both consider all collection options and enter one of the options with the IRS. When John gets an IRS collection option, he is in good standing with the IRS and will avoid enforced collection.
- Look for opportunities to lower the balances owed: Not facing IRS enforcement, John can now look at prior balances owed for any missed deductions or credits. He can look for opportunities to file an amended return to lower the balances owed. Also, John can evaluate whether he qualifies for penalty abatement, including first-time abatement, to lower amounts owed.
- Stay in filing and payment compliance and complete the terms of the agreement: John will need to stay in good standing. John will need to file on time to avoid added penalties, pay according to his installment agreement, and avoid an unpaid balance due return in the future, especially by making estimated tax payments. If John entered into an installment agreement as his collection option and his financial situation gets worse (for example, he becomes unemployed), John can renegotiate the agreement with the IRS (perhaps currently not collectible status).
Stopping the cycle of IRS problems: John files his 2014 and 2018 returns. He adds $14,000 of penalties and interest to his current $22,000 balance owed. His total balance owed is $36,000. John focuses on not owing in the future and starts making estimated tax payments for the first quarter of 2019. His estimated payment is $1,500 for each quarter so that he will not owe at the end of the year.
After filing and making his first estimated tax payment, John is now in good standing and he qualifies to enter into a collection alternative with the IRS. John determines that his best alternative is an IRS streamlined installment agreement to pay over 72 months. (For more on IRS installment plans, see “
The importance of resolving during tax season
In our example, John is much more likely to be able to get caught up in the first quarter of the year. He can start making estimated tax payments and not have to catch up on back quarters to avoid owing in the following year. He also has tax filing on his mind and a tax professional as a resource to help him get back into filing compliance by filing late returns.
Tax season is the best time for tax debtors who owe each year to reverse the noncompliance cycle. Waiting past tax season just puts more obstacles to getting filing and payment complaint — and running the risk that the problems lasts again for another year.
