Tax Debt and the IRS
By Mariette “Pete” Luchini, CPA, Wenatchee Certified Public Accountant
Arguably one of the worst ways to spend your time is dealing with the IRS over tax debt. It ranks with the likes of stomach flu and waiting in line at the DMV. The good news is the IRS will generally work with you in order to collect the debt. Maintaining communication with the IRS is a step in the right direction. It is a good policy to never ignore IRS correspondence.
Today’s commonplace scams by people purporting to be from the IRS collections division can cause panic. However, tax debt is generally known by a taxpayer well in advance. Communication from the IRS shouldn’t be a surprise. It always starts on paper from the US Postal Service. If notification is a surprise, you should seek the advice of a qualified tax professional.
Two of the more common types of unpaid taxes are delinquent 941 deposits and unpaid personal federal income taxes. Federal 941 deposits are what businesses must remit to the government for payroll withholding and taxes. For a company in financial distress, it can be tempting to not remit this money to the government as it is an easy “loan” to get and can really help cash flow. However, the penalties are steep and effectively snowball, even doubling a balance due. Not remitting these taxes is especially risky because simply closing a company doesn’t make the debt go away. Any number of people involved, from owners to employees, can be deemed a responsible party. The debt will be assessed on those individuals’ personal tax returns. Not remitting taxes can also be converted to criminal charges as the so-called loan is in reality a theft of government funds. It’s better to lay off employees and close your doors than to “borrow” 941 monies as a means to stay afloat during difficult times.
With the complexity of the U.S. tax structure, it’s not uncommon for taxpayers to be surprised on April 15th with a large tax bill. For taxpayers that don’t have the cash to pay the full balance there are some options. If the debt is less than $25,000, the IRS may accept a streamlined installment agreement allowing you to pay the debt over 72 months. Amounts over $50,000 require a lot of personal financial data, so more time and effort is involved. The key with any tax debt is to maintain communications with the IRS. While less than 50% of phone calls to the IRS are being answered, rest assured that the IRS debt collection service will always find time for you. The caveat to the installment agreement: stay current. This means that, going forward, any required estimated payments must be paid timely. All future income tax must be paid when due. Missing just one payment defaults the agreement, and the full balance is due immediately.
If you are in a bind financially, the IRS may allow a reduced payment plan or even put you on “currently not collectible” status (no payments, at least short term) if you qualify. Another option is to make an Offer in Compromise. Eligibility for this is limited to those who generally have less in net assets than tax debt, but it’s a good way to get a clean slate if you qualify. Lastly, if repeated attempts to solve a tax problem with the IRS fail, contact the National Taxpayer Advocate service. While a division of the IRS, it has proven to be extremely skilled at navigating the IRS departments and helping taxpayers who have not been able to get relief otherwise.
Pete Luchini is a Certified Public Accountant with Cordell, Neher & Company, PLLC, a Wenatchee public accounting firm.
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