ARE YOU A FIRST TIME DELINQUENT TAXPAYER
Its April 10, 2010, I find myself sitting across the conference room table from a long time client. John has owned a Landscaping business for 15 years. I have just told him that he owes over $10,000 in Income Taxes. John looks up at me, his face white, eyes brimming with tears. He slowly says, “Frank, I don’t have that kind of money. I don’t even have enough money for next week’s payroll. What am I going to do? Do I need to layoff all my guys? Am I going to lose my House? I have never owed money before. What am I going to do?”
It’s no surprise that in these tough economic times, we are dealing with more taxpayers who have fallen behind on their tax payments. These first time delinquent taxpayers not only have a balance due with there 2009 returns, but they are also falling behind on there 2010 estimated tax payments. With little or no cash available, the tax liability are piling up, and taxpayers just don’t know what to do. That’s where we come in. As tax professionals it’s our responsibility to give our clients all the information they need in order to best deal with their situation.
This article touches on the basics of various options in full that are available to taxpayers, Because each situation is different, you’ll need to carefully discuss the pros and cons of each option with you the client so they you can reach a decision that best would meet your needs. What you the taxpayer need to understand is that they should not panic, you should not wait, and you should not ignore communications from the taxing agency involved.
#1. PAYING THE BALANCE IN FULL
This is first and most obvious is to pay the balance in full.
However, it’s the lack of available cash that has put you the taxpayer in this predicament in the first place. In this economy, business owners are spending any available cash on operating expenses just to keep you doors open. You the individual taxpayer are spending their income on housing, gas, food and utilities. Many of you did not to this point by choice. The situation was forced upon you by factors beyond your control. Therefore we suggest that you gather up you dollars andante balance in full becomes a ridiculous option.
#2 INSTALLMENT AGREEMENTS
A more appropriate option available is by requesting an installment agreement. The IRS, as well as most state , will consider an installment agreement. If the amount is less than $10,000 and other conditions are met. Theirs will automatically accept the agreement. However, it is important to not that penalties and interest will continue to accrue. Therefore, installment agreements should be created with the shortest term possible. During the installment period, the tax agency will most likely confiscate any other tax overpayments from other periods and apply them to the outstanding balance. We advise you to make sure that the monthly amount you agree upon is appropriate and that you can pay it every month on time. It you become delinquent on you monthly payments, the taxing agency can easily void the agreement and you back at square one.
#3 SHORT TERM PRIVATE LOANS.
Perhaps a short term private loan would work for you. This option includes a possible home equity loan, a short-term unsecured loan, or eve a short-term cash advance on your credit card. In these cases, you need to be aware of any hidden fees, such as closing costs associated with a home equity loan, or the “cash Advance” fee associated with accessing cash via a credit card. Either way, interest will be charged. And you should weight the interest charged by the taxing authority versus the interest charged by the bank. This option does not eliminate any additional penalties the IRS and/or state may impose and it frees up any other tax overpayments.
#4 AMNESTY PROGRAMS
Amnesty programs are also another option for you although these tend to be more beneficial to you who have failed to file tax returns in the past. Often times, to qualify for these programs, you the taxpayer must not be on the tax agency’s “Radar Screens.” What this means is of course you have not received any failure to file notices. Amnesty programs will often forgive some or all of the penalties and /or interest, but may require that the original tax liability be paid in full at the time you request amnesty. These programs are offered sporadically and there requirements vary from state to state.
#5 OFFER IN COMPROMISE
Another, more drastic option is an offer in compromise. I liken this to filing for bankruptcy. it’s a last ditch effort with the IRS and may state tax agencies. The process is very time-coming and invasive. And I would not recommend that you represent yourself during the offer process. You need to be aware that there are often filing fees associated with submitting an offer in compromise, and there are no guarantees. With an offer in compromise, the tax agency analyzes your assets and liabilities, current and future income, and current monthly expenses. There is heavy documentation requirements. And you have to prove all monthly items of income and expense with copies of Bank Statements, bills, and invoices. The fair market value of assets such as Real Estate, Personal Property, and Investments needs to be determined. The tax agency takes all this information into account and calculates an amount for which they are willing to settle the debt and what payment arrangements they are willing to accept.
During this process, there is a great deal of dialogue between the tax agency and the tax professional. Negotiating appropriate fair market values, cost of living expenses, and payment options are among some of the conversations that will take place. If the tax professional is not satisfied with the outcome, an appeal can be filed. From my professional experience and others along with me. We have never been satisfied with the first figure that a tax agency has presented, and have always appealed the decision.
Once a offer is accepted, you need to keep your tax account in good standing (filing tax returns and paying taxes on time) for a certain period of time or the offer can be rescinded and again, you’ll be back to square one. Often times a lien may be placed against you and become part of your credit report and public records. However, under the right circumstances, the tax agencies have accepted pennies on the dollar. And for you who is truly in a tough spot, an offer in compromise can be not only a blessing, but the only viable option available.
I do need to warn tax professionals and you the taxpayers concering some television and /or internet advertisements for these services. You should perform your own due diligence and make sure that the professional you choose to represent themselves during the offer process is truly qualified to perform such services. (such as a CPA, or EA) Even if someone is a CPA or EA, that does not mean they have the proper experience. Check to make sure that they have direct experience with the offer process. I seen wonderfully qualified EA who can prepare any 1040 placed in front of them, but that does not mean they have the technical background to prepare returns for multi-state S Corporations that reports in all 50 states.
If you don’t deal with offers in compromise, be wary of referring you to anyone who promises they are able to settle for a specific amount before they even see the facts. Be especially cautious of anyone who offers to provide this service with a fee based on a percentage of the tax they save you. These folks are often under qualified to represent you and there business practices may be suspect.
#6 SUMMARY
Unfortunately, we tax professionals all over the country expect to see more and more of these first time delinquent taxpayers in 2010. The writing is already on the wall. With unemployment rates on the rise, business closings are on the rise, loan are getting harder to obtain and you the taxpayer are going to continue to fall behind on your tax liabilities. We as Tax Professionals can help by being proactive, not reactive.
Its April 10, 2010, I find myself sitting across the conference room table from a long time client. John has owned a Landscaping business for 15 years. I have just told him that he owes over $10,000 in Income Taxes. John looks up at me, his face white, eyes brimming with tears. He slowly says, “Frank, I don’t have that kind of money. I don’t even have enough money for next week’s payroll. What am I going to do? Do I need to layoff all my guys? Am I going to lose my House? I have never owed money before. What am I going to do?”
It’s no surprise that in these tough economic times, we are dealing with more taxpayers who have fallen behind on their tax payments. These first time delinquent taxpayers not only have a balance due with there 2009 returns, but they are also falling behind on there 2010 estimated tax payments. With little or no cash available, the tax liability are piling up, and taxpayers just don’t know what to do. That’s where we come in. As tax professionals it’s our responsibility to give our clients all the information they need in order to best deal with their situation.
This article touches on the basics of various options in full that are available to taxpayers, Because each situation is different, you’ll need to carefully discuss the pros and cons of each option with you the client so they you can reach a decision that best would meet your needs. What you the taxpayer need to understand is that they should not panic, you should not wait, and you should not ignore communications from the taxing agency involved.
#1. PAYING THE BALANCE IN FULL
This is first and most obvious is to pay the balance in full.
However, it’s the lack of available cash that has put you the taxpayer in this predicament in the first place. In this economy, business owners are spending any available cash on operating expenses just to keep you doors open. You the individual taxpayer are spending their income on housing, gas, food and utilities. Many of you did not to this point by choice. The situation was forced upon you by factors beyond your control. Therefore we suggest that you gather up you dollars andante balance in full becomes a ridiculous option.
#2 INSTALLMENT AGREEMENTS
A more appropriate option available is by requesting an installment agreement. The IRS, as well as most state , will consider an installment agreement. If the amount is less than $10,000 and other conditions are met. Theirs will automatically accept the agreement. However, it is important to not that penalties and interest will continue to accrue. Therefore, installment agreements should be created with the shortest term possible. During the installment period, the tax agency will most likely confiscate any other tax overpayments from other periods and apply them to the outstanding balance. We advise you to make sure that the monthly amount you agree upon is appropriate and that you can pay it every month on time. It you become delinquent on you monthly payments, the taxing agency can easily void the agreement and you back at square one.
#3 SHORT TERM PRIVATE LOANS.
Perhaps a short term private loan would work for you. This option includes a possible home equity loan, a short-term unsecured loan, or eve a short-term cash advance on your credit card. In these cases, you need to be aware of any hidden fees, such as closing costs associated with a home equity loan, or the “cash Advance” fee associated with accessing cash via a credit card. Either way, interest will be charged. And you should weight the interest charged by the taxing authority versus the interest charged by the bank. This option does not eliminate any additional penalties the IRS and/or state may impose and it frees up any other tax overpayments.
#4 AMNESTY PROGRAMS
Amnesty programs are also another option for you although these tend to be more beneficial to you who have failed to file tax returns in the past. Often times, to qualify for these programs, you the taxpayer must not be on the tax agency’s “Radar Screens.” What this means is of course you have not received any failure to file notices. Amnesty programs will often forgive some or all of the penalties and /or interest, but may require that the original tax liability be paid in full at the time you request amnesty. These programs are offered sporadically and there requirements vary from state to state.
#5 OFFER IN COMPROMISE
Another, more drastic option is an offer in compromise. I liken this to filing for bankruptcy. it’s a last ditch effort with the IRS and may state tax agencies. The process is very time-coming and invasive. And I would not recommend that you represent yourself during the offer process. You need to be aware that there are often filing fees associated with submitting an offer in compromise, and there are no guarantees. With an offer in compromise, the tax agency analyzes your assets and liabilities, current and future income, and current monthly expenses. There is heavy documentation requirements. And you have to prove all monthly items of income and expense with copies of Bank Statements, bills, and invoices. The fair market value of assets such as Real Estate, Personal Property, and Investments needs to be determined. The tax agency takes all this information into account and calculates an amount for which they are willing to settle the debt and what payment arrangements they are willing to accept.
During this process, there is a great deal of dialogue between the tax agency and the tax professional. Negotiating appropriate fair market values, cost of living expenses, and payment options are among some of the conversations that will take place. If the tax professional is not satisfied with the outcome, an appeal can be filed. From my professional experience and others along with me. We have never been satisfied with the first figure that a tax agency has presented, and have always appealed the decision.
Once a offer is accepted, you need to keep your tax account in good standing (filing tax returns and paying taxes on time) for a certain period of time or the offer can be rescinded and again, you’ll be back to square one. Often times a lien may be placed against you and become part of your credit report and public records. However, under the right circumstances, the tax agencies have accepted pennies on the dollar. And for you who is truly in a tough spot, an offer in compromise can be not only a blessing, but the only viable option available.
I do need to warn tax professionals and you the taxpayers concering some television and /or internet advertisements for these services. You should perform your own due diligence and make sure that the professional you choose to represent themselves during the offer process is truly qualified to perform such services. (such as a CPA, or EA) Even if someone is a CPA or EA, that does not mean they have the proper experience. Check to make sure that they have direct experience with the offer process. I seen wonderfully qualified EA who can prepare any 1040 placed in front of them, but that does not mean they have the technical background to prepare returns for multi-state S Corporations that reports in all 50 states.
If you don’t deal with offers in compromise, be wary of referring you to anyone who promises they are able to settle for a specific amount before they even see the facts. Be especially cautious of anyone who offers to provide this service with a fee based on a percentage of the tax they save you. These folks are often under qualified to represent you and there business practices may be suspect.
#6 SUMMARY
Unfortunately, we tax professionals all over the country expect to see more and more of these first time delinquent taxpayers in 2010. The writing is already on the wall. With unemployment rates on the rise, business closings are on the rise, loan are getting harder to obtain and you the taxpayer are going to continue to fall behind on your tax liabilities. We as Tax Professionals can help by being proactive, not reactive.