The following article, published on the Illinois State Bar Association, Family Law Section, by Alan Stumpf, Stumpf & Gutknecht, P.C.
Last week the WSJ warned taxpayers about the duty to file an income tax return, and the roadmap of what happens after the filing delinquency, in the article, “The IRS is the most powerful creditor in the country. When you owe taxes, blowing off your filings has immediate consequences that get worse the longer you ignore them.” (Wall Street Journal, Kiersten Essenpreis July 10, 2020)
We do see these problems arise in representing our clients in dissolution of marriage, estate administration, planning, real estate and agricultural transactions. The article gives some guides for resolution of delinquent tax problems. In the article, we are told, “If you owe Uncle Sam, blowing off tax filings has immediate consequences that compound and are almost impossible to escape, because the IRS is the most powerful creditor in the nation. The article notes:
“To get its money, the IRS can file a lien on your property that wrecks your credit, seize your bank account, and take your wages. It can even get money from your IRA or 401(k) savings account, and you’ll owe tax on the withdrawal,” says Bryan Skarlatos, a criminal tax attorney with Kostelanetz & Fink in New York.
“However, taxpayers can take steps to minimize the damage if they can’t pay in full or at all. With tax debts, small moves can mean big differences.
Here’s an example: Two of the IRS’s most potent penalties are for failure to file a return and failure to pay tax. If someone doesn’t file or pay $1,000 of tax for a year, then the failure-to-file penalty adds $435 to the bill and the failure-to-pay penalty adds $60. The $495 total is often far higher than credit card interest on a similar amount.
Interest is also due on unpaid taxes and penalties. It compounds daily, currently at an annual rate of 3%. In this case it adds another $45 after a year. Smaller penalties may apply as well.
But say this same taxpayer files the IRS form to get an automatic three-month filing extension by July 15 and then files a return by Oct. 15. Even if this person can’t pay the balance due, filing the return on time removes the large failure-to-file penalty. If this person can pay something, the cost can shrink further.
The IRS isn’t known for its mercy, but it has programs and other measures for taxpayers who can’t pay what they owe. These can be confusing, especially for filers who haven’t used them before, so here are steps to take and pitfalls to avoid in this extraordinary tax year.
File something by July 15. As the example above shows, the failure-to-file penalty is immediate and large.
Be sure your return is accurate, and try to file it by July 15. If that’s impossible, then file IRS Form 4868 by July 15 to get an automatic three-month extension to prepare the form until Oct. 15.
There’s no extension to pay your tax, so interest on what you owe starts accruing on July 15 even though you have an extension to send in the return and may not know exactly what you owe yet.
If you miss these deadlines, file as soon as possible. Bottom line: If you can’t pay, you should still file.
Know which excuses work. The IRS abates penalties for “reasonable cause,” with the pandemic as a possible cause this year.
Still, the reasonable-cause defense has limits. For example, a family death or serious illness three years ago probably won’t count as an excuse to be late in filing or paying 2019 taxes.
Taxpayers with a clean record until their lapse can often receive a “first-time abatement” because of prior good behavior.
Understand the IRS’s payment plans. It can be fairly simple to pay back taxes to the IRS. To qualify for a short-term payment agreement, you must owe $100,000 or less in taxes, penalties and interest and be able to pay within 120 days. Usually, this plan can be set up quickly online at IRS.gov. There’s no set-up fee for online agreements.
Taxpayers who need longer than 120 days to pay and owe less than $50,000 can opt for an installment agreement. For many, the online set-up fee is $31 for a plan with direct monthly debits and $149 for one without monthly debits.
Consider how to raise funds. Mr. Skarlatos warns that penalties and interest continue to compound on unpaid taxes if you use an IRS payment plan. So he recommends borrowing the funds from a bank, a 401(k), a relative or even a credit card, if possible. Congress eased terms for 401(k) loans due to the pandemic.
Beware of sales pitches promising miracles. For taxpayers who can’t pay the IRS in full, a program known as Offers in Compromise may accept a lower amount in settlement. Some firms promising to secure these offers advertise on radio or TV.
The IRS typically accepts less than 40% of offers it receives. Fees to firms that advertise them can be high and include recurring charges while the IRS considers a proposal over many months.
IRS Commissioner Chuck Rettig urges taxpayers seeking an offer in compromise to check with the IRS first.
“To hear some of these ads, struggling taxpayers can think their tax debts will magically disappear. Many people can avoid unnecessary disappointments and fees by quickly reviewing the program or asking an IRS representative,” he adds.
If all else fails… The IRS won’t pursue tax debtors if that leaves them without living expenses. In this case, the account is designated as “currently not collectible” and the IRS pauses collections, usually for up to a year. Penalties and interest continue to accrue.
To qualify for this status, says Szu-Ju Chang, an attorney in Las Vegas who has worked extensively with low-income taxpayers, a person will need to provide detailed information about income, expenses, and assets for the IRS to assess.”
For information on other sources of income tax penalties, see: “Interest and Penalties on Restitution-Based Assessments“, July 31, 2019 by Keith Fogg
The IRS can raise a penalty once the case arrives in Tax Court. IRS Attorney Can Impose Penalties, May 20, 2019 by Keith Fogg.
Review of 2019 (Part 3), December 30, 2019 by Keith Fogg,
Stumpf & Gutknecht, P.C.