Unpaid Income Taxes

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Dealing with Unpaid Income Taxes? Tax Attorney Pat Komor Can Help You Get Back on Track

The IRS has significant power under the law to collect unpaid income taxes.  However, if you owe money to the IRS, and you cannot pay your bill in full, there are several options that may be available to you.

Our experienced IRS tax attorney can evaluate the options that may be available to you.  You may qualify to pay over time using an IRS installment agreement, delay payment temporarily due to financial hardship, or reduce or eliminate the amount you owe using a program called an Offer in Compromise.   If you filed a joint return, but the taxes owed relate solely to your current or ex-spouse, in some cases, you can petition the IRS to be relieved of that tax joint liability.

Lastly, we often hear from people who want to know if they can get out of IRS penalties and interest.  While it is almost impossible to get out of interest on unpaid taxes, there are situations where IRS penalties may be abated.

The IRS has specific criteria that must be met for someone to qualify for each of these options.  Contact our experienced IRS attorney today to learn if you might qualify for one of these programs.

If you have unpaid income taxes because you have an unfiled income tax return, we can determine the options for paying your tax bill, and get relief from the worry of not knowing when the IRS will realize you have not filed, and come after you for back taxes and penalties.

Paying Over Time – IRS Installment Agreement

If you cannot pay your tax bill in full all at once, you can apply for an installment agreement to pay the IRS over time.  The IRS installment agreement is similar to other liabilities that you may pay over time, like a mortgage or car loan – you pay monthly principal and interest payments over a specific time period.  Any penalties will also be included.  The IRS charges a user fee to set up an installment agreement.  The criteria to obtain an IRS installment agreement varies based on multiple factors such as the amount that you owe and your tax compliance.

If you apply for an installment agreement, the IRS is prohibited from levying on (taking) your assets while your application is pending or while you are paying on an approved installment agreement.

The IRS separates installment agreement options based on the amount of time you need to pay.  If you can pay within 180 days, you can use the short-term payment plan (which is not technically an installment agreement).  If you need more than 180 days to pay, the IRS offers different types of installment agreements, which all have different qualification requirements.

Short-term Payment Plan

If you can pay the full amount due within 180 days, you can take advantage of the IRS short-term payment plan.  This is not a formal payment plan, so there is no application and no fee.  The IRS will allow you this additional time upon request, and if you can’t pay immediately but will be able to pay within 180 days, this can be a great option.  It is important to note that interest and any penalties will continue to accrue during the 180 days, until the tax debt is paid in full.

Long-term Payment Plan (Installment Agreement)

If you would like to pay over time but need more than 180 days, a formal IRS installment agreement may be the right option for you.

There are several different options available depending on how much you owe and what type of tax.

The following Installment Agreements options are available:

Guaranteed Installment Agreements

You have the right to an installment agreement (without submitting a financial statement) if:

• The amount of tax you owe (not counting interest and penalties) is less than $10,000.
• You (and your spouse, if you filed a joint tax return) have filed and paid all taxes due for the last five years.
• Neither you (nor your spouse, if you filed jointly) have had an installment agreement with the IRS in the previous five years.
• You can pay the full amount you owe within three years.
• You agree to pay the liability before the period for collecting the tax expires.
• You comply with the tax laws during the agreement.

Streamlined Installment Agreements

The next IRS Installment Agreement option is called a Streamlined Installment Agreement.  This option may be available depending on how much you owe and the type of tax that is due. There are two Streamlined Installment Agreement options.  For both types, you must pay the debt in full within the shorter of 72 months (six years), or the time limit for the IRS to collect the tax.  Therefore, even though this installment agreement may allow a person to pay off the tax over six years, if the time limit remaining for the IRS to collect your particular tax is five years, you will need to pay the balance off within five years.  You won’t need to submit a financial statement for this type of installment agreement.

Streamlined Installment Agreement Options

Option 1: Your assessed tax balance is under $25,000 (include all assessed tax, penalty, and interest in computing the balance due).

This Streamlined Installment Agreement is available to: individuals, businesses that are still operating and only owe Form 1120 income tax (corporate income tax) or Form 1065 (partnership income tax) late filing penalties, and Businesses that have gone out of business that owe any type of tax.

Option 2: Your assessed tax balance due is from $25,001 to $50,000 (include all assessed tax, penalty, and interest in computing the balance due).

This is available to: individuals and out-of-business sole proprietors.

In order to qualify for the agreement when the balance due is between $25,001 and $50,000, you must pay through either a direct debit or payroll deduction agreement.

Partial Pay Agreements

This type of agreement may apply to you if you have some ability to pay toward your tax debt, but you can’t pay in full within the remaining time the IRS has to collect.  If you qualify for the partial pay installment agreement, the IRS may allow you to make payments until the collection period expires even though these payments may not fully pay off your tax debt.

In order to qualify you will need to provide financial information to have this type of agreement established.  In addition, your financial situation will be evaluated every 2 years thereafter, until the collection period expires or the tax debt is fully paid, whichever is earlier.

You can contact the IRS directly at 800-829-1040 or the number on the notice you received from the IRS to discuss this option. If you’re in this situation, you might also want to consider submitting an Offer in Compromise to settle your taxes instead of an installment agreement.

In-Business Trust Fund Express Agreement

An In-Business Trust Fund Express agreement may be available for businesses that owe up to $25,000. You must pay the debt in full in 24 months or before the collection period expires, whichever is earlier. You can also pay down the liability to $25,000 or less and then apply.

Routine Installment Agreements (All Other Installment Agreements)

If you don’t meet the criteria for guaranteed, streamlined, or in-business trust fund express installment agreements, you can still request an installment agreement from the IRS.  You can request a routine installment agreement by mail or by calling the IRS, but you cannot apply online.

Contact us today to discuss whether you might qualify for an IRS installment agreement, or if you would like our assistance in applying for one.

Delaying Payment due to Financial Hardship – Currently not Collectible

If your current financial circumstances prevent you from paying your tax bill, you may qualify to have the IRS suspend collection action against you until your financial situation improves.  This is called “currently not collectible,” and is a temporary halt to IRS collection actions.

To obtain this temporary halt to IRS collection proceedings, you would need to demonstrate that your financial hardship meets the IRS criteria, which is based on an evaluation of your income, expenses, and assets.  The IRS looks to see if your expenses, based on specific standards, are higher than your income.  We understand the IRS’ criteria and will advocate for you before the IRS.

When the IRS places you in “currently not collectible” status, you are relieved from the weight of a bill that you can not pay.  However, it is important to note that the IRS will continue to monitor your financial situation, and if your circumstances change for the better, they may restart collection action against you.

Reducing Balance Due – Offer in Compromise

An Offer in Compromise (OIC) is an IRS program that will reduce or eliminate your tax liability if you meet the IRS’ criteria.  If your financial situation prevents you from paying your tax bill and your situation is not expected to change, an Offer in Compromise should be considered.  If the IRS grants you an OIC, the relief that they give you is permanent as long as you comply with IRS requirements.

The IRS has specific information that they require on the application, and the IRS limits this option to persons who have a significant financial hardship that is expected to continue.

First, in order to be considered for an OIC, you must have filed all of your tax returns, received a bill for at least one year that is included on the OIC application, made all required estimated tax payments for the current year, and if you own a business that has employees, you must have made all required tax deposits for the current and two preceding quarters.

Next, the IRS will only accept an OIC if the amount you offer is equal to or above your “reasonable collection potential”, or RCP.  The RCP is the IRS’ evaluation of how much you can pay.  In determining this amount, the IRS will consider your income, expenses, and assets.  Determining the RCP can be a complicated procedure, as the IRS allows expenses based on its own method, and not necessarily what you actually pay per month.

While completing an OIC offer is complicated, if you are experiencing significant financial hardship that is expected to continue and you meet the other IRS criteria, you may be eligible to be relieved of your tax liability.  Contact us to discuss whether your situation could qualify you for this program.

Allocating Joint Tax Liability to Current or Former Spouse

If you file your income tax return as “married filing jointly”, you are accepting responsibility for all of the taxes that may become due for that return, whether they are related to your income or the income of your spouse.  If there are unpaid taxes from that return, the IRS can choose to collect from either spouse or both spouses.  The IRS does not have to collect equally from both spouses and can choose to collect the entire liability from just one of the spouses.  This can present a hardship, for example, if a person is separated or divorced but additional tax is due from a joint return filed in the past.

There are three options for requesting that the IRS remove you from being liable for tax due on a joint income tax return.

Innocent spouse relief: you can apply for relief from taxes owed on the income of your spouse or former spouse, if that spouse failed to report income, reported income incorrectly, or did not properly claim deductions or credits.

Separation of Liability relief: you can apply to have an additional tax that is due on a return allocated between you and your spouse or ex-spouse, based on which person is responsible for the item that gave rise to the tax liability.

Equitable relief: You can apply for equitable relief when you do not qualify for innocent spouse relief or separate liability relief for an item that was not appropriately reported on the joint return and was generally attributed to your spouse.

Each of these options applies to specific liabilities and requires you to meet specific criteria set forth by the IRS.  If you believe that you might be eligible to apply for this program, contact us today.

Unfiled Income Tax Returns

If you have unfiled tax returns, it’s important to take action as soon as possible. The sooner you file, the sooner you can get any refunds you’re owed if it’s not too late, and the more you can avoid penalties and interest.

Why should you file previously unfiled income tax returns?

First, when you don’t file your tax return on time, the IRS will prepare a substitute tax return on your behalf. This means that they create a tax return for you, using the information that was sent to them on W-2 and 1099 forms. When they prepare your return, the IRS will count all of your income from these sources.  However, because they do not have information about your deductions, you will not receive credit for your deductions, and their calculation of your taxable income is likely to be much higher than it would have been if you had prepared the return.  The IRS will then charge you this higher tax amount, and in addition, impose penalties and interest on this higher amount.

Second, if you had taxes withheld from your paycheck, you have a limited time to file a return to obtain any refunds due to you related to those withheld amounts.  You must claim a refund within two years from the time that the withheld tax was paid.  Amounts that are withheld during a tax year are generally considered to be paid as of April 15 of the following year.  See Treas. Reg.  § 301.6513-1(b).  For example, if you had tax withheld from your paycheck during the year 2021, for purposes of the two-year refund window, the withheld tax is considered to be paid on April 15, 2022, and no refund would be available after two years from that date.  Essentially, by not filing a return, you may be giving up any refund that you might have been entitled to.

Third, you may reduce penalties.  If there was an issue that prevented you from filing on time, and that issue qualifies for penalty abatement, the IRS will often consider abatement only during the time period when the issue that prevented you from filing is happening.  The IRS expects you to file as soon as the issue that prevented you from filing is over, and if you do not, they will be much less likely to abate any penalties associated with the unfiled return.  Penalties can add up fast, so avoiding them can save you a significant amount of money.

Lastly, if you do not file a return, the IRS has an unlimited amount of time to create a return for you and send you a tax bill based on the return that they created.  If you file a return, the IRS has a specific time period (usually 3 years, but sometimes longer) during which they can audit your return and charge you additional tax. Once this window ends, the IRS can no longer audit you and charge you additional tax.  However, if you do not file a return, this time limitation does not apply to the IRS, and they can create a return for you at any time and impose taxes, penalties and interest on the amount due.  Both penalties and interest increase with the passage of time, so the more time that has gone by, the higher the amount you will have to pay.

How do you file a previously unfiled return?

First, you should gather all of your financial information for income and deductions for the year at issue.  For income, you can request that the IRS send you the Forms W-2 and 1099 that they have on file for you by requesting a “wage and income transcript” here.  If you are self-employed and you did not receive a Form 1099 for all of the work you performed, then you would need to gather all the documents showing any sources of income that may not be on file with the IRS.

Next, make sure that you use the IRS form for the year at issue.  You may not be able to file electronically for older years, so you may need to file a paper form or seek the help of a tax adviser.

If you file, but cannot afford to pay all of the tax that is due, there are various options you can consider.

If you would like help with unfiled returns, contact our experienced IRS attorney today for help.

IRS Penalties and Interest

Penalties

The IRS will often impose penalties when tax laws are not followed.  For example, IRS penalties are imposed when an income tax return is filed late, or when tax due to the IRS is not paid on time.  A common mistake that results in penalties relates to extensions to file a tax return.  An extension extends the date by which the return must be filed, but it does not extend the date by which the tax must be paid.  For example, if your return is due on April 15 but you obtain an extension to file the return on October 15, the tax due must be estimated and paid by April 15.  If you do not pay by April 15, you will be subject to the failure to pay penalty.

Other penalties include, but are not limited to, failure to pay sufficient estimated taxes and penalties related to reporting too little tax due on your return.

In some circumstances, the IRS may agree to remove penalties.

First-Time Penalty Abatement

The IRS has a penalty abatement program for those who have received failure to file, failure to pay, or failure to deposit (payroll taxes) penalties for the first time (or the first time in four years).  The abatement applies only to the first tax period in which the penalty was applied.  To be eligible to request this, you must have filed all required returns, have had no penalties or penalty abatements in the previous three years, and be current with all required tax payments.

Reasonable Cause

The IRS may waive or abate penalties for certain reasons, including “reasonable cause”. The reasonable cause could include things like fire, flood, or other natural disasters, an extended illness that prevented you from carrying on business activities, the death of a close family member, or other reasons.  The IRS has provided examples of reasonable cause here.

Each situation is considered based on its unique facts, and the request must be made at the time the issue ended, or very shortly thereafter.  For example, if you did not file your taxes because your records were destroyed by a fire, but you have diligently worked to recreate your records and are filing as soon as you have recreated the records, the IRS may determine that you had “reasonable cause” for filing late, and may be willing to not charge penalties.

If the IRS has imposed penalties on you, it is important to address this as quickly as possible. Contact us to see if you may qualify to request penalty abatement.

Interest

The IRS charges interest when amounts due to the IRS remain unpaid.  The interest charges are very difficult to avoid because the law does not provide flexibility on this issue.

In addition to the penalties themselves, the IRS charges interest on both the amount due for unpaid taxes and the penalty amount.  The best way to reduce IRS interest is to reduce the amount due to the IRS, through any of the methods discussed above, and pay the IRS as quickly as possible.

Komor Tax Law, LLC is Here to Help

We understand how intimidating it can be when you have unpaid taxes. You don’t have to handle unpaid income taxes alone. Contact Attorney Komor for help in determining what options you have to address your unpaid income tax liability.

Contact Komor Tax Law, LLC for help in resolving your federal tax issues today.