April 2018 JD Supra
jd supra logo

Unexpected Tax Bill and you Cannot pay the full amount of Taxes you Owe? was published by JD Supra on 4/16/19.

Many Taxpayers might be faced with an unexpected tax bill during

the 2018 Tax season.  Many Taxpayers did not alter their tax withholding in their paychecks to reflect the changes in the Tax Reform.   The changes made to the US Tax Code by the Tax Cut and Jobs Act such as the limit on State and Local Taxes (SALT) and the loss of certain itemized deductions for many have added a level of complexity this tax season for Taxpayers.  As a result, there is a growing population of Taxpayers that are not seeing refunds but rather tax bills.

What if a Taxpayer unexpectedly owes taxes?

All taxes owed must be paid in full by the due date, which is Monday, April 15, 2019.   IRS states that a Taxpayer with an unexpected Tax Bill and a Taxpayer that cannot pay the full amount of taxes owed, should still file a tax return by the deadline and pay as much as the Taxpayer can in order to minimize penalties and interest. The IRS may assess penalties to Taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline.  If a Taxpayer is not able to pay the tax owed by the original filing due date, the balance is subject to interest and a monthly late payment penalty.

IRS has different Tax Payment options for Taxpayers

IRS tax payment options can include a short-term extension to pay, an installment agreement or an offer in compromise, or a temporary delay in collection by reporting a Taxpayer’s account as currently not collectible until a Taxpayer is able to pay.  A specialized tax professional with experience dealing with the IRS can assist a Taxpayer in obtaining the optimal option:

⦁    Full Payment Agreements (up to 120 days)

Taxpayers that can’t pay in full immediately may qualify for additional time –up to 120 days– to pay in full.   IRS will not charge a fee for this full payment but will apply interest and any applicable penalties until the tax liability is paid in full.  

⦁    Installment Agreements

Taxpayers that are not able to pay their balance within 120 days may qualify for a monthly payment plan – also known as an installment agreement.  A payment plan allows the Taxpayer to make a series of monthly payments over time. The IRS offers various options for making monthly payments:

⦁    Direct debit from the Taxpayer’s bank account,

⦁    Payroll deduction from the Taxpayer’s employer,

⦁    Payment by Electronic Federal Tax Payment System (EFTPS),

⦁    Payment by credit card via phone or Internet,

⦁    Payment via check or money order, or

⦁    Payment with cash at a retail partner.

Taxpayers must be current on all filing and payment requirements before the IRS considers granting an Installment Agreement. Taxpayers in an open bankruptcy proceeding aren’t generally eligible. IRS charges a fee for Installment Agreements.

⦁    Offer in Compromise

Taxpayers that can’t pay in full under an installment agreement may propose a partial payment installment agreement or an offer in compromise (OIC). An OIC is an agreement between the Taxpayer and the IRS that resolves the Taxpayer’s tax liability by payment of an agreed upon reduced amount. Before the IRS will consider an offer, the Taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. Taxpayers in an open bankruptcy proceeding aren’t eligible to enter into an OIC.   

⦁    Temporarily Delay Collection

Taxpayers that can’t pay any of the amount due because payment would “prevent” the Taxpayer from meeting their basic living expenses can request that the IRS delay collection until they are able to pay. If the IRS determines that the Taxpayer can’t pay any of your tax debt because of financial hardship, the IRS may temporarily delay collection by reporting the Taxpayer’s account as currently not collectible until the Taxpayer’s financial condition improves. Being currently not collectible does NOT mean the debt goes away. It means the IRS has determined that the Taxpayer can’t afford to pay the debt at this time. Penalties and interest continue to accrue until the Taxpayer has paid off the debt in full.

Don’t be a Victim of your own Making

Dealings with the IRS can be a complicated process.  Taxpayers ought to consult their tax specialist when confronted with an unexpected tax liability and are unable to pay. The IRS “urges all taxpayers to check their withholding for 2019, especially those who made withholding adjustments in 2018 or had a major life change. Those most at risk of having too little tax withheld from their pay include taxpayers who itemized in the past but now take the increased standard deduction as well as two-wage-earner households, employees with non-wage sources of income, and those with complex tax situations”.

Taxpayers also ought to understand the importance of responding to an IRS notice.  The IRS has the right to take collection action such as filing a Notice of Federal Tax Lien, serving a Notice of Levy, or Offsetting a refund to which the Taxpayer is entitled. The IRS may size assets such as wages, bank accounts, social security benefits, and retirement income. The IRS also may seize a Taxpayer’s property; such as a car, boat, or real estate, and sell the property to satisfy the tax debt.