This past spring when 2018 tax returns were due, because of changes from the new Trump tax law, some taxpayers were left with jaw-dropping tax liabilities they were not expecting. What happens if they can’t pay the tax? There are options for individual taxpayers and we will take a look at each of them.
The first thing to note is tax returns should always be filed even if the funds to pay the bill are not available. Why? There are penalties that can be levied because the returns are not filed, separate from interest and penalties from not having paid the tax due shown. So the lesson here is to always file the returns regardless of whether the tax can be paid. Ok, let’s get onto the show.
Taxpayers that have a small balance due that can be paid in full within 120 days, should pay whatever they can when the returns are filed. The IRS will send the taxpayer a bill for the remaining tax due plus a small amount of interest. The Internal Revenue Service (IRS) refers to this as a Full Payment Agreement. This is the easiest and most time efficient of the choices.
The second choice is submitting an Installment Agreement (IA) with the IRS. If the balance due cannot be paid off over the short period of time mentioned above then an IA is an option. There are some formalities to an IA:
1. During the past 5 years the taxpayer (and spouse if married filing jointly) have timely filed their returns and paid any tax due
2. The taxpayer agrees to pay the full amount owed within 3 years
3. The taxpayer is unable to pay the liability in full with the return
4. Administrative fees under $100 are required to be paid when setting up an IA
The IA option is generally accepted by the IRS if the above requirements are met.
The IRS will review the above payment options and if those options have been exhausted they will consider an Offer in Compromise (OIC) as the final option available. The OIC is just that – an offer to compromise on the tax owed. By choosing this route, the taxpayer hopes the IRS will take less than the full amount owed to satisfy the tax obligation. There are 5 requirements necessary for the IRS to consider an OIC:
1. The taxpayer has not filed for bankruptcy
2. From 656, the OIC package must be submitted and is 27 pages long!
3. $186 application payment must be included
4. If the taxpayer chooses a lump-sum (6 or fewer installment payments) offer to the IRS, that offer must include a 20% payment of the offer
5. If the taxpayer chooses a longer payment period (> 6 installment payments) the taxpayer must comply with the taxpayer’s own proposed payment schedule while the OIC is being considered
Typically, taxpayers in this position are in a tough spot financially and don’t see any way to pay the full tax due. The IRS will look at all the facts and circumstances surrounding the OIC application to determine ‘doubt as to collectability’. When the IRS receives the completed 27 page OIC, they will use it to figure out how able the taxpayer is to pay the tax. Then the IRS determines whether to accept the OIC for less tax than was due on the returns. The IRS has accepted roughly 40% of the OIC requests it has received over the last few fiscal years so it’s not a given an OIC will be accepted.
Actually, there is a 4th option. That involves not paying the tax which leads to having property confiscated, wages garnished, or getting thrown in jail but those are not advisable. Though the taxpayer may not have the funds to pay the tax due right away, there are options available to them in this situation. Message me with any questions.