Choices for taxpayers who don't have cash to pay their income tax bills

As the April 18th deadline for filing 2016 income tax returns draws near, practitioners may encounter some clients who don't have cash to pay the balance due on their returns. Clients can avoid penalties but not interest if they can get an extension of time to pay from IRS. But such extensions merely postpone the day of reckoning for the period of the extension (generally, six months). This Practice Alert examines ways in which financially distressed clients may be able to defer paying their income taxes, including installment agreements and offers in compromise with IRS.

Paying in full within 120 days. A taxpayer can pay the full amount owed within 120 days, without having to pay any fee, but interest and any applicable penalties continue to accrue until the tax is paid in full. Taxpayers can use an online payment application (irs.gov/individuals/online-payment-agreement-application), or call IRS at 800-829-1040 (individuals) or 800-829-4933 (businesses).

Installment agreements. Taxpayers unable to pay the full amount owed within 120 days may be able to enter into an installment agreement with IRS to pay the tax. Apply using Form 9465, Installment Agreement Request, and Form 433-F, Collection Information Statement. (irs.gov/individuals/payment-plans-installment-agreements)

There are different rules for taxpayers who owe $10,000 or less, and for taxpayers who owe $50,000 or less.

Taxpayers are eligible for a guaranteed installment agreement—in other words, IRS is required to enter into the agreement—if the aggregate amount of the liability (determined without regard to interest, penalties, additions to the tax, and additional amounts) is not more than $10,000 and:

• During the past five tax years, the taxpayer (and spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement for payment of income tax;
• The taxpayer agrees to pay the full amount owed within three years and to comply with all Code provisions while the agreement is in effect; and
• The taxpayer is financially unable to pay the liability in full when due and submits information that IRS may require to make this determination (i.e., a financial statement). (Code Sec. 6159(c)(2); Reg. § 301.6159-1(c)(1))

RIA observation: Despite the last condition, the Instructions to Form 9465, Installment Agreement Request (last revised in December of 2013), and the Internal Revenue Manual (at 5.14.5.3), note that it is the practice of IRS to grant these installment agreements even if the taxpayer can pay his liability in full if the tax owed is not more than $10,000 and the taxpayer meets the other criteria.

There's a streamlined procedure for granting agreements for payment of tax in installments for amounts of $50,000 or less. IRS may accept streamlined installment agreements without requiring financial statements if 

1. The taxpayer owes $50,000 or less in combined tax, assessed penalties and interest,
2. Has filed all returns, and
3. Will pay up within 72 months, or will pay in full before expiration of the collection statue of limitations, whichever comes first. (IRM 5.14.5.2, 
   irs.gov/individuals/online-payment-agreement-application)

RIA observation: IRS is running a test program until Sept. 30, 2017, under which the qualification criteria for installment agreements is relaxed for some taxpayers who owe more than $25,000 but not more than $50,000 in tax, penalties, and interest. In addition, streamlined processing criteria also will apply, for the first time, to taxpayers whose unpaid balance is more than $50,000 but less than $100,000. See Weekly Alert ¶ 9 11/03/2016 for details.

Under recently finalized regs, the following fees apply to installment agreements entered into on or after Jan. 1, 2017, except for low-income taxpayers:

• $225 for regular installment agreements, where a taxpayer contacts IRS in person, by phone, or by mail and sets up an agreement to make manual payments over a period of time either by mailing a check or electronically through the Electronic Federal Tax Payment System (EFTPS). (Reg. § 300.1(b))
• $107 for direct debit installment agreements, where a taxpayer contacts IRS by phone or mail and sets up an agreement to make automatic payments over a period of time through a direct debit from a bank account. (Reg. § 300.1(b)(1))
• $149 for online payment agreements, where a taxpayer sets up an installment agreement Online Payment Agreement application on irs.gov and agrees to make manual payments over a period of time either by mailing a check or electronically through the EFTPS. (Reg. § 300.1(b)(2))
• $31 for direct debit online payment agreements, where a taxpayer sets up an installment agreement Online Payment Agreement application on irs.gov and agrees to make automatic payments over a period of time through a direct debit from a bank account. (Reg. § 300.1(b)(2))

The fee is $43 for certain qualifying low-income taxpayers, but is reduced to $31 when the taxpayer pays by way of a direct debit from the taxpayer's bank account with respect to online payment agreements. (Reg. § 300.1(b)(3))

Offer in compromise (OIC). An OIC is an agreement between a taxpayer and IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, won't qualify for an OIC in most cases. IRS says that to qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. (irs.gov/taxtopics/tc204.html)

IRS may compromise a tax liability on any of the following grounds:

1. Doubt as to liability. There must be a genuine dispute as to the existence of amount of the correct tax debt.
2. Doubt as to collectibility. Such doubt exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
3. To promote effective tax administration. An offer may be accepted on this ground if:
   
   
   1. Collection in full of the tax owed could be achieved, but
   2. Requiring payment in full would either create an economic hardship, or would be unfair and inequitable because of exceptional circumstances. (Reg. § 301.7122-1(b))

To request an OIC, the taxpayer must apply via Form 656, Offer in Compromise. He also must submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). The OIC application generally must be accompanied by a $186 application fee. However, the fee is waived for certain low income taxpayers, or if the OIC is based on doubt as to liability. (Form 656-B, Notice 2006-68, 2006-31 IRB 105, Sec. 4.03)

Except with regard to offers filed by low-income taxpayers, or based only on doubt as to liability, an OIC must be accompanied by a nonrefundable payment that depends on how the taxpayer is offering to pay.

• A taxpayer may propose to pay in a lump sum, i.e., an offer payable in five or fewer installments within five or fewer months after the offer is accepted. If such an offer is made, the taxpayer must include with the Form 656 a payment equal to 20% of the offer amount. This payment is required in addition to the $186 application fee.
• A taxpayer may propose to make periodic payments, i.e., six or more monthly installments made within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment also is required in addition to the $186 application fee. (Code Sec. 7122(c)(1))

Temporarily delay the collection process. One final option, if payment would create financial hardship, is to ask IRS to delay collection until the taxpayer is able to pay. If IRS determines that the taxpayer cannot pay any of his or her tax debt, it may report the taxpayer's account as currently not collectible and temporarily delay collection until the taxpayer's financial condition improves. Interest and penalties continue to accrue until the tax debt is paid in full. (irs.gov/businesses/small-businesses-self-employed/temporarily-delay-the-collection-process)

The taxpayer may be asked to complete a Collection Information Statement (Form 433-F, Form 433-A or Form 433-B) and provide proof of financial status (this may include information about assets and monthly income and expenses). During a temporary delay, IRS will again review the taxpayer's ability to pay, and may also file a Notice of Federal Tax Lien to protect the government's interest in his assets. To request a temporary delay of the collection process or to discuss other payment options, contact IRS at 1-800-829-1040 (individuals) or 1-800-829-4233 (businesses).

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IRS Notice CP40

If you receive a CP40 form from the IRS, it is to notify you that they have used all or part of your refund to pay your tax debt. The letter will go into more details about how they used your refund.

If you still owe money after the IRS has applied your refund to your taxes owed, you can do a few things:

1. Set up a payment plan to pay off the rest of your taxes. Payment plan info.
2. Have your accountant or someone else contact the IRS on your behalf to handle the issue. You will need to fill out Form 2848 in order to do this.
3. If you disagree with the notice, you can call the IRS to discuss your options.

If only part of your refund was used to pay off tax debt, you will receive the balance via check.

You can see an example of the form you will receive if this is the case, here.

You can always give me a call if you have any questions about the tax debt you have, what your refund will be, and what to expect after filing this year's taxes. 818-368-5374.

4 Top Child and Dependent Tax Exemptions

Some countries give a flat money amount to families for each child they have. Seems a lot simpler sometimes than the myriad of options available for claiming dependents on your annual tax return. But we aren't other countries, so below I've outlined the top 4 exemptions you can take if you have kids.

1. Earned Income Tax Credit

If your income is below a certain level and how many children you have. If you earn up to $47,955 or $53,505 if married and filing jointly, and have 3 or more children, you qualify. If you have 2 children, it's $44,648 or $50,198 if married and filing jointly. Lastly, if you have just 1 child then your earnings and adjusted gross income has to be less than $39,396 or $44,846 if married and filing jointly.

This credit can give you up to $6,269 maximum for 3 children or $506 if you have no children. This tax credit is also refundable. This means if you owe less than the credit, IRS will pay you back the difference!

2. Dependency Exemption

Each child you claim as a dependent earns you $4,050 as an exemption. An exemption reduces your income that is subject to federal taxes. So if you make $50,000, with the dependency exemption, you can lower that taxable amount by $4,050 or more!

For those in the 15-25% tax bracket, you can save $600-$1,100! The higher your tax bracket, the more impact this has on your tax savings.

3. Child and Dependent Care Credit

This is a credit that reduces your taxes based on what you spend for childcare. The credit is between 25-35% of your childcare expenses. The exact amount is dependent on your income. Many types of care are included in this credit, including private kindergarten, after school programs, daycare and more.

4. Child Tax Credit

This is a $1,000 credit you may be able to take for any child under 17 that you can claim as a dependent. The credit is determined by your income, single or married.

If you aren't sure which deductions or credits you can claim, and what your taxable income is, give me a call!

The IRS has a great chart with an outline about all child related benefits, which you can find here.

When are estimated taxes to the IRS due?

If you're self-employed, knowing when estimated taxes are due can help avoid any issues with the IRS.

Why is this important for self-employed people specifically? Generally if you are employed, you have taxes withheld from each paycheck. But this is generally not the case with contractors or others who own their own business. This means you may have to pay the IRS estimated taxes throughout the year, and there are deadlines for this.

The next estimated tax due in 2016 is January 15.

Generally the schedule is as follows:

First Quarter: April 15 (Jan 1 - Mar 31)
Second Quarter: June 15 (Apr 1 - May 31)
Third Quarter: September 15 (Jun 1 - Aug 31)
Fourth Quarter: January 15 (Sept 1 - Dec 31)

Your accountant can easily calculate what you owe. If you are using a tax software, generally they can do this as well. You can pay electronically or via check. You can get the address on where to mail a payment here.