Category Archives: Unpaid or Underpaid Taxes

When is Paying Something Better than Paying Nothing?

I have previously outlined the range of options when someone is dealing with vigorous collection activity by either the IRS or NYS (see the August, 2013 entry).  At one end of the spectrum are those who have the financial ability to pay but they need more time to do so.  For those taxpayers, a payment plan is really the right solution to work through.  But what if full payment will never be feasible?  For these taxpayers, two very real possibilities are the submission of an Offer in Compromise or having the case marked as “currently not collectible,”  or “CNC.”  This brings us to the question: When is it better to resolve a tax debt through an Offer and when is it better to have a case marked “CNC?”

Simply stated, having your case marked CNC is always the least expensive and most expeditious way to fend off the collection process.  If the IRS (or NYS) is persuaded to reach this determination, no money must be paid for this result nor will any payments be expected to be made on the account.  That will continue to be the case unless something happens to change that determination.  This last clause is really the rub; CNC is not a complete resolution of the situation.  As a practical matter, a CNC determination may turn out to be the final resolution but that finality only comes if the CNC determination remains in place until the collection statute of limitations (generally 10 years for the IRS and 20 years for NYS) expires.

In comparison, if an Offer is accepted now there is closure to the collection process, but with one important proviso: once an offer has been accepted the taxpayer must remain fully compliant with the filing and payment requirements for at least 5 years after the Offer is accepted or else the compromised debt will be reinstated.

So which is better, settlement through an Offer or having the matter marked as non-collectible?  Five primary considerations factor into the question:

  1. The cost of getting CNC versus an accepted Offer. (Without question, the Offer process will be more expensive.)
  2. The time remaining on the collection statute of limitations. (If that time is short, then the CNC result is more attractive.)
  3. The likelihood of financial circumstances changing before the collection statute of limitation expires. (If positive changes are anticipated, the Offer will be more attractive.)
  4. The impact of having a Notice of Federal Tax Lien on record. (The tax lien filing will go away when an offer is accepted and remain if CNC is the result.)
  5. The need for closure/peace of mind. (While both bring peace of mind, usually the Offer is the more lasting solution.)

Both the Offer and the CNC determination are good outcomes.  Which is better can be debated.  Our knowledgeable tax professionals at Bousquet Holstein can help you evaluate the foregoing factors, and perhaps others, when making this important decision.

Governor Cuomo Announces Initial Results of Tax Scofflaw Driver License Suspension Initiative

Governor Andrew M. Cuomo today announced that 8,900 New Yorkers had their driver licenses suspended for failing to pay taxes they owe the State. The crackdown is the result of legislation signed into law last year aimed at encouraging individuals who owe more than $10,000 in back taxes to settle their bills with the Tax Department.

To read the Governor’s release and for more information, click here.

Some Fundamental Considerations When Facing a Tax Problem

When a tax problem arises it is not uncommon to become overwhelmed and sometimes even paralyzed by the situation. No doubt much of the anxiety is due to the uncertainty of whether the problem can be solved and how to go about doing so. More and more self-professed tax experts advertise promising results with such individuals in mind. Many of these so-called experts, however, take a very narrow “one size fits all approach” when dealing with a tax problem. That is unfortunate; oftentimes there are many options that should be evaluated before a decision is made as to how best to proceed. My next few blogs will consider how, in my opinion, a tax professional should evaluate a tax problem. The discussion begins with an overview of how to approach a tax problem and then delves into some of the details regarding the different phases of a tax problem.

When I assist with a tax problem I always look at the situation as having two distinct phases. Phase I deals with how much is owed. Phase II deals with how to pay the amount owed. Most of the time you know whether you are in Phase I or Phase II of the process. For example, if you receive an IRS audit notice, you are clearly in the early stages of a Phase I situation. If you receive a collection notice after filing a tax return without full payment of what you agree is due, this is a Phase II issue. But what if you never filed a tax return reporting a balance due and now the IRS serves a wage garnishment on your employer? Where are you in the process? What are your options?

Faced with this scenario, a seasoned tax professional would rightfully want more information from both the taxpayer and the IRS before evaluating how best to proceed. The questions that come to my mind on hearing these basic facts include: Did you recently move and possibly not receive an audit notice? Is it possible the IRS prepared one or more returns for you (referred to as a substitute for return) based upon limited information reported to the IRS? Has there been an identity theft? Each of these inquiries relate to the Phase I question of whether a tax is owed in the first place, and if so, how much is really owed.

While sorting out these questions, additional consideration would need to be given to the impact of the wage garnishment that has now occurred. On that subject the questions that come to mind include: Was the wage garnishment issued from an IRS service center or out of a local office? Has there been any prior collection notice or action taken before the garnishment? Is a voluntary payment arrangement preferable? Is a bankruptcy filing something to be considered? All of these inquiries deal with Phase II aspects of the problem.

While there are often recurring themes and typical situations when tax problems arise, solutions are best when tailor-made for the specific taxpayer in question. Evaluating where the taxpayer is in the process helps determine what options are available. The “one size fits all” approach may result in a resolution, but it may not be the best solution under the circumstances.

Settling Large Tax Debts with the IRS Just Became Easier

It seems you can not watch TV, listen to the radio, or read the newspaper without seeing at least one of those ads for someone claiming to be a “Tax Specialist” who can fix your IRS problems.  Helping people with tax issues seems to be big business these days.  Most of these advertisements are pushing what is a rather longstanding program with the IRS known as the “Offer in Compromise.”  In my experience, the Offer Program is an excellent program with one significant caveat; you must meet the stringent requirements to qualify.  None of the ads bother to mention this important detail.

                Last month the IRS announced that in 2010 they accepted 27% of all Offers submitted.  In 2011 that number rose to 34%.  In my estimation, those numbers are too low.  Given how the Offer Program works, acceptance rates should be well over 80%.  What this means to me is that too many offers are being submitted by people that don’t qualify.  This would seem to reinforce my impression that too many people claiming to be “Tax Specialists” are really just salespeople.  Like anything that is important in life, if you need professional assistance make sure you find someone who knows what they are doing.

                There are a lot of details behind the Offer in Compromise process.  At the heart of it, the IRS is measuring a taxpayer’s ability to pay by quantifying both the taxpayer’s equity in assets and available cash flow.  Understanding the rules that underlie how this calculation is arrived at is critical.  Just this month, the IRS announced some very favorable changes to some of these rules which should show a significant improvement in the acceptance rates of submitted Offers.  In my practice, this will mean that a lot more people should now have the opportunity to settle substantial tax obligations for much less than what is owed.  This very recent change in a longstanding program is clearly an indication that the IRS would like to resolve more cases than recent statistics indicate. 

                The Offer in Compromise program is not for everyone.  If a taxpayer cannot settle with an Offer, there are always other options ranging from convincing the IRS that you cannot afford to pay anything to setting up payment arrangements over as much as four or five years.  Experienced tax practitioners should be able to assess key information relatively quickly and steer individuals and businesses to the best solution available.

Tax Lien or Tax Levy: Which is Worse?

If you owe the IRS money and arrangements are not made for payment, eventually you are likely to see one or more tax levies and be impacted by the filing of a tax lien.  What is the significance of these two collection activities?  Let’s start with some basic definitions.  A tax levy is the means by which the IRS compels someone (typically a bank) that is in possession of the taxpayer’s property to turn that property over to the IRS.  A tax lien is the means by which the IRS encumbers property owned by the taxpayer (most importantly real property) and establishes its position as a secured creditor in relation to other creditors of the taxpayer.  A tax levy is either mailed or hand delivered to the person/bank that has the taxpayer’s property.  A tax lien (which technically arises automatically when a tax is due) is asserted by the filing of a Notice of Federal Tax Lien in the county clerk’s office where the taxpayer resides.

So which of these collection devices is most significant?  It depends.  In my estimation, the tax levy is the more powerful and disruptive tool as it requires the third party holding the taxpayer’s property to turn that property over to the IRS in rather short order.  But if the third party doesn’t have any property of the taxpayer when the levy is served, then the tax levy has no effect.  One good thing about a tax levy is that it is not a public action.  That is to say, no one other than the third party is ever made aware of the fact that the taxpayer owes money and that collection activity is underway. 

 A notice of federal tax lien, on the other hand, is a very public act.  When a notice of federal tax lien is filed, all the world is now on notice of the unpaid tax debt.  The taxpayer’s credit will immediately be impacted because credit agencies, lenders, and other financing services will see the tax debt when searching the county records where the taxpayer resides.  Notwithstanding these negatives, a tax lien does not require the taxpayer (or anyone else) to do anything with the property encumbered by the lien.  The filing of the tax lien notice simply secures the debt.      

So which is worse?  There is no right answer to that question; both are very powerful tools in the IRS’ arsenal of collection devices.  There are ways to navigate around, or in spite of, a tax lien and tax levy but it is always best to avoid them if possible.  If you are facing collection issues with the IRS, the assistance of an experienced tax practitioner may help you do just that.

An Interesting Change in Strategy Because of Interest Rates

The New York State Department of Taxation and Finance has released their new interest rates for the second quarter of 2012.  Although these rates have not changed from the prior quarter, this announcement is a reminder of the significant interest charges that New York State is now charging when there is an unpaid tax.  The “basic” underpayment rate on most types of unpaid taxes 7.5%.  If that isn’t bad enough, the underpayment rate for sales and use taxes is a whopping 14.5%!  A sliver of good news:  if the State determines that the failure to pay sales tax is due to reasonable cause and not willful neglect, it will use the 7.5%.  Perhaps all of this would be more palatable if the State was as generous when they owed you money.  No such luck.  If you overpay your taxes, the State pays you 2% interest.

Clearly none of these interest rates are tied to current market rates.  What these rates reflect is the State’s determination to increase revenues from delinquent taxpayers.  If these rates were imposed only on those who chronically underpaid their legitimate tax debt, the higher rates could be an effective compliance tool.  But these rates also apply when there is a bona-fide disagreement over whether a tax debt is owed.  In that instance, these exorbitant rates can result in a very costly (dare I say punitive) price to pay to exercise the right to question whether a tax is really owed.

If someone has a dispute over whether a tax is owed, there are still two basic options:  contest the liability without paying anything until all appeal rights are exhausted or, pay the tax and then seek a refund.  Traditionally, no one ever wanted to pay the tax when they didn’t think it is owed, so the first option was almost always taken.  But now with the State’s high interest charges coupled with the fact that your money is not earning much interest sitting in a bank, the economics of how to approach a tax dispute have changed. 

Consider a simple scenario.  If the liability at issue is $20,000 and the dispute goes on for two years, at least $3000 of interest (using the 7.5% rate) could be added to the bill if you are unsuccessful.  (The cost would be $5,800 if sales taxes are involved and the 14.5% rate applied).   Even if the appeal is partially successful and you settled for $10,000, the two-year interest charge of $1,500 is an expensive price to pay to dispute the bill.   If instead you paid the $20,000 and then were unsuccessful on appeal, at least the cost has been held to $20,000.  If you resolved the matter for $10,000 of tax, the State would then refund you $10,000 plus 2% interest for two years (a total of $10,400); thereby reducing the tab from the original $20,000 to $9,600. 

There may still be good reasons not to pay disputed taxes before pursuing a tax appeal, and it is best to understand all of your options, and their implications, when you face a tax problem.  These higher interest rates now add another important consideration in the process.

Some payment options with the IRS just got a little kinder and gentler!

When you owe the IRS money and you can’t pay everything right away,  typically there are three  options:  (1) convince the IRS you can not currently pay anything and have your account marked as “currently not collectible;” (2) set up a payment arrangement; or (3) seek to settle through the offer in compromise program.  Each option has its pros and cons.  The IRS recently announced some helpful changes if you want to pursue the second option of setting up a payment plan.

 Rules for IRS payment plans have always been classified based on how much is owed.  These rules generally address the length of time that can be given for payment, the amount of financial disclosure required before a monthly payment amount will be accepted, and whether a tax lien will be filed.  The significant thresholds of balances owed are $10,000, $25,000, $50,000 and over $100,000.   As you would expect, the more you owe the more involved the rules become.  Therefore, as a threshold consideration,  before approaching the IRS about a payment plan, consider whether a partial payment can be made to move you down a tier or more in the escalating set of rules.   

 The recent changes relate to the “streamline installment agreements” for taxpayers owing less than $25,000 and those owing between $25,000 and $50,000.  In each instance, taxpayers may now be given up to six years to pay an obligation (increased from five years).  Taxpayers owing between $25,000 and $50,000 now need to make monthly payments by direct debit from a bank account.  Also, at this higher level some financial disclosure will be requested but the sole purpose for gathering this information is to ensure that the payments can be maintained for the life of the plan, not to glean the highest monthly payment that can be made.  Generally a tax lien will not be filed at either of these levels under the streamline rules.

 If a payment plan is the best option to resolve a tax debt, all of these changes should make setting up a payment plan easier.

I Haven’t Filed My Tax Returns…Is There Hope?

              I am often asked:  “If I can’t pay the tax due with my return, am I better off not filing until I have the money to pay?”  While the situation presents some complexities, the advice is simple:  it is always best to file your tax returns on time even if you can’t pay.  Such filing eliminates the failure to file penalty (which, along with the failure to pay penalty, can grow to as much as 25% of the tax due) and the possibility of the much more serious criminal consequences for not filing.  (These are the IRS consequences; each state has similar rules for their returns as well.)

            But what happens if I didn’t file a tax return, or worse yet, several returns?  Here’s the good news, it’s not hopeless.  Many people don’t file their tax returns.  The reasons for non-filing can run the gamut from serious medical or personal issues, natural disaster, economic reversal, business failure, and so on.  (I intentionally exclude illegitimate reasons for non-filing as the consequences for those are much different.)  In my experience, if someone hasn’t filed for one year, typically they haven’t filed for several years.  This prolonged period of non-filing typically starts with one of the reasons listed above, but the repeated failure to file results from the uncertainty – – really the fear — that “coming back into the system” will be too costly and potentially devastating.  Those that do not file one or more returns very often find themselves in what seems an inescapable and unsolvable predicament. 

            Fixing a non-filing situation is not always pain-free but there are options for non-filers and certain choices are much better than others.   Most importantly, for at least 25 years it has been the IRS’ policy not to press criminal charges for non-filers who voluntarily file their past due returns.  Returns are considered filed “voluntarily” as long as the IRS hasn’t commenced any investigation or contacted the non-filer before the returns are filed.  So the best option for the non-filer is to get the returns filed – before the IRS asks you to file them.  (Even when the IRS asks for unfiled returns, it is not automatic that criminal charges will be asserted.)

            What if you haven’t kept your records (W-2s, 1099s, etc.) to prepare your returns?  Don’t let that be an excuse.  All of that information is available from the IRS.  In fact, if you plan to file returns for the past several years it is a good idea to request that information before filing just to be sure you report everything that the IRS already knows about.   Once the return(s) have been filed, there are three basic options to then consider in dealing with the amount due:  full payment (all at once or over time), settlement through an offer in compromise, or having the debt found to be “currently not collectible.”     If penalties are been imposed after the return is filed, which is very likely to be the case, those additional charges may be removed if the taxpayer can demonstrate that the late filing was due to reasonable cause and not willful neglect.

            Nonfilers that I have worked with are almost universally relieved to learn that the heavy burden of not being in noncompliance can be resolved, often with consequences much less severe than ever envisioned.

If you find yourself in a hole, stop digging…

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.