Ever hear the expression, “If you find yourself in a hole, stop digging.” That is as good a place to start when someone has fallen behind in their obligation to pay their taxes. So often when someone has a tax problem I see that they are always playing catch up.
A typical scenario may be: Bob files his 2009 return late with a big balance due. Determined to fix the problem, he stops his withholding for 2010 and he starts paying all of his 2010 tax money over to the IRS to pay off the 2009 bill. Or if Bob is self-employed, he commits to pay over a lump sum payment (when his next deal closes) and neglects to make his estimated tax payments for the 2010 income. So now, when the 2009 debt is satisfied, the 2010 return comes now due and Bob realizes he is going to owe about as much again for 2010. My advice: stop digging Bob. What Bob is doing is running up more penalties and interest than is necessary.
A better approach would be to contact the IRS and come up with a payment plan to pay off 2009 which allows Bob to stay current on his obligation for 2010, and beyond. Yes, penalties and interest will continue to accrue on the 2009 balance until it is paid off, but failure to file and failure to pay penalties max out at 25% of the tax for each year. Consider that the cost of needing more time to pay the 2009 debt. Using the “catch-up” approach, Bob is now likely to face that 25% penalty for each year he owes. In the long run, he will pay a lot more than he should have to.
If you fall behind for one year, work out a plan for that year that allows you to stay current for subsequent years. Now you have minimized the cost of having fallen behind.
After representing both the IRS (for over 4 years) and then taxpayers that have IRS and NYS tax issues (for over 22 years), it seems I have seen and dealt with just about every tax problem that a business or individual can face. Most taxpayers that I have worked with come to me with a problem that typically falls into one of the following categories:
- I haven’t filed a tax return for several years and I want to set things right
- I owe more than I can possibly pay and I’ll never dig out of this mess
- the IRS or NY just levied my bank account or garnished my pay and I can’t pay my bills
- I just received an audit notice and I don’t know how best to proceed
- I have fallen behind in making payroll tax deposits or sales tax payments
While all of these situations, and others like them, are serious and rightfully create real anxiety and concern, most of these tax problems have very manageable solutions. In fact, when these situations arise, oftentimes the IRS and NYS are looking for a solution as well.
So what is the best way to deal with a tax problem? Essentially it’s the same way you deal with other problems you may face. If you had an unusual health concern or your car broke down what would you do? You would look for someone (a doctor or a mechanic) who knows what s/he is doing, you would find out and understand your options, and then you would commit to do the things you need to do when the advice is given. You should follow the same course of action when you face a tax problem.
The Tax Advocacy Practice Group at Green & Seifter has decided to set up this blog as a forum to disseminate some practical information about what some of the options are when a tax problem arises. Of course, everyone’s situation is different and the specific facts and circumstances of each person’s (or business’) situation must be known before any final decision about what to do should be made. In this blog, a member of our Tax Advocacy Practice Group will consider some of the common situations that we see in our practice and share some of the strategies to consider when facing either an IRS or NYS tax problem.