Spring is in the air… and Taxpayers are scrambling to get their Federal, State and local income tax returns prepared and filed. Some are struggling to pay their income tax.

 

Due Dates:

Here are the key Income Tax Return deadlines for 2011 calendar year taxpayers (filing Returns and paying the taxes due):

  1. April 17, 2012.
  2. Partnerships and LLC’s Taxed as Partnerships. April 17, 2012.
  3. March 15, 2012.

Taxpayers may extend the deadline for filing their Returns with a timely filed Extension.

That is, if the Taxpayer prepares and files a complete and valid Extension with the government on or before the deadline, they should be granted extra time to file their Returns. If a Return is not filed (or properly extended on a timely basis) the Taxpayer is subject to late filing penalties.

Of course, the Extension only extends the time to file, not the payment of the tax. If there is a tax due, the IRS, IDOR and other taxing bodies require that the tax be paid no later than the original due date of the Returns. If a Taxpayer does not pay the full balance of the tax due by the original due date, the Federal and State income tax laws provide for interest and penalties (i.e. failure-to-pay penalties). Taxpayers cannot reduce or avoid interest or penalties by delaying the filing of their Tax Returns.

 

Extra Time To Pay:

Where Taxpayers do not have the money to pay their tax when due, they can apply to the IRS for “extra” time to pay. Even if the IRS allows them extra time, the unpaid balances will still be subject to interest. However, if the IRS allows the Taxpayer extra time, and the Taxpayer complies with all of the rules, the IRS may waive penalties.

The IRS allows a “streamlined” process for getting extra time to pay if the balance due is under a certain amount (Installment Agreement – Form 9465) and a more detailed process if over that amount (Collection Information Statement – Form 433).

Up until recently, Taxpayers could use Form 9465 to get an Installment Agreement in place if the balance due was not greater than $25,000. The IRS announced on March 7, 2012 that Taxpayers can use Form 9465 for balances due up to $50,000. This means that fewer taxpayers will have to endure the more detailed process discussed below.

If the balance due is greater than $50,000 then the Taxpayer must prepare and file a “Collection Information Statement (Form 433-A or Form 433-F). This requires detailed information about one’s assets, income, bank accounts, etc. People sometimes compare it to what would be required to apply for a loan, which is a good analogy since from the IRS’ point of view, the tax is their money and that they are “loaning” the tax money to the Taxpayer.

The Taxpayer will “propose” how much they will pay up front and how much they will pay each month thereafter. If the IRS likes the deal proposed by the Taxpayer, they may accept it. However, the IRS is under no obligation to agree to give a Taxpayer more time to pay, even if the Taxpayer files a complete and accurate Form 9465 or Form 433 on a timely basis.

Plan Not Accepted: If the IRS does not accept a Taxpayer’s initial plan the Taxpayer may have an opportunity to propose another plan. Ultimately, if the plan is not accepted then the Taxpayer is subjected to the full range of penalties, interest and collection (e.g. liens, garnishment, levy’s, etc.) available to the IRS under the law.

Plan Accepted: If the IRS accepts the Taxpayer’s proposed payment plan, and the Taxpayer then complies with the terms (i.e. makes the installment payments on time) then the IRS may waive penalties and forego collection. However, if a Taxpayer violates the plan, then the Taxpayer is again subjected to penalties and collection.

In some cases, payment plans extend for many months. However, the IRS generally requires, as part of any plan, that the Taxpayer remain current with future years’ tax payments. So, for example, if the IRS approves a payment plan for a Taxpayer’s 2011 tax, the Taxpayer must not only make the installment payments on time, but must also current with their 2012 tax obligations.

 

New Penalty Relief:

The IRS announced on March 7, 2012 that they may give certain financially distressed Taxpayers (who are unable to pay their tax) a 6-month grace period from penalties. The penalty relief is available to 2 categories of Taxpayers:

  1. Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 (during the period from January 1, 2012 to April 17, 2012).
  2. Self-employed individuals who suffer a 25% or greater reduction in business income in 2011 due to the economy.

However, Taxpayers are not eligible if:

  • The 2011 balance due exceeds $50,000, or
  • Their filing status is Single, or Head of Household and their income exceeds $100,000, or
  • Their filing status is Married Filing Jointly and their income exceeds $200,000.

If a Taxpayer thinks that they might be eligible, they must complete and file new IRS Form 1127A (Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship).

 

Offer in Compromise:

Offer in Compromise (OIC) is an IRS program for Taxpayers who are unable to pay their income tax. Under OIC, the IRS may, in certain special situations, agree to settle the entire balance due for some lesser amount. This reflects the fact that the IRS is pragmatic. While they want to collect as much tax as quickly as they can they know that in some situations, it is better for them to get what they can now and move on.

The OIC process is often long and tedious. The IRS requires a lot of information. If the IRS believes that the Taxpayer can pay the balance in a lump sum, or through a payment plan, the IRS will not agree to an OIC. Of course, the IRS has the legal authority to “strongly encourage” Taxpayers to pay up (e.g. interest, penalties, liens, levy’s, garnishments, seizure of assets, etc.).

There are many legitimate attorneys and CPA’s that assist legitimate Taxpayers in OIC. However, there are also many shady people involved (advisors and Taxpayers) in OIC.

Taxpayers should make sure that they are completely forthcoming and that all documents submitted are true and correct. If not, the IRS may not only refuse an OIC, but go after the Taxpayer for fraud (civil and/or criminal). Taxpayers should also be very careful who they hire to assist them in OIC. There are many who offer OIC services who will take an up-front fee and not perform and others that try to collect (up-front) a percentage of possible savings.

 

Conclusion:

Taxpayers who comply with the tax laws and pay their tax on time will save money and heartache. When they have legitimate payment problems, facing them head on and requesting a payment plan may allow them to save money and avoid liens, confiscation and possible jail time. Although the IRS and other taxing bodies may not be “kind or gentle” they can be pragmatic.

 

 

4/2012

Copyright ©, Keith B. Baker – 2012

This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.

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