The recession brought on by the COVID-19 pandemic is going to cause many taxpayers to struggle to pay their tax liabilities. Individuals may not be able to pay their 2019 income taxes or their payment plan that was already in place for prior years. Businesses may be unable to pay their sales and payroll tax liabilities because their revenues have declined. This article will cover the recent tax relief provided by the Internal Revenue Service (IRS) and provide an overview of available options for taxpayers in financial distress after the IRS relief expires.
The IRS announced a three-month extension for taxpayers to file and pay their income taxes for 2019 due to the COVID-19 crisis. The payment and filing deadline was moved from April 15, 2020 to July 15, 2020. First-quarter 2020 estimated taxes are also now due on July 15. If a taxpayer intended to pay their 2019 taxes by the original deadline, this is good news, as the government has provided a 90-day interest-free “loan” on those funds. If a taxpayer is unable to pay their 2019 income taxes, installment agreement payments, or prior year taxes, they have a variety of options.
Anyone who cannot pay their 2019 income tax liability should still file their 2019 income tax return on time, even if they cannot pay what they owe, to avoid late filing penalties. The IRS charges a late filing penalty of 5% per month for each month the return is late, with a maximum penalty of 25%. The late filing penalty is easily prevented, and any taxpayer who cannot pay the IRS would be better off avoiding the 25% penalty, which would compound their problem further. The other thing that you must keep in mind is that the IRS will charge late payment penalties and interest after the July 15 deadline passes, even if the taxpayer files an extension. The late payment penalty is 0.5% of the outstanding tax balance for each month you’re late, up to 25% of the unpaid balance. The IRS interest rate for late payments is the Federal Reserve short-term rate plus 3%. The interest rate is currently 5%, but it will decline to 3% on July 1, 2020.
If a taxpayer is unable to pay their 2019 income tax liability or liabilities from prior years, they have a couple of options. First, they can delay payment and basically “do nothing” for a period (usually, at least six months). This is counterintuitive since the IRS is a federal agency with powerful collection abilities. Still, it can be the right answer for specific taxpayers who need to improve cash flow to repay the IRS or pay their estimated taxes or necessary living expenses instead of the IRS in the meantime. The IRS is required to issue a letter called a “Final Notice of Intent to Levy” and then wait thirty days before they can garnish pay or seize property from a taxpayer. Taxpayers following this strategy would wait until the issuance of this notice before acting. The IRS also recently announced its People First Initiative. This initiative provides for a moratorium on the IRS taking any enforcement action (filing liens, garnishing pay, or seizing property) until at least July 15, so even if a final notice was issued, a taxpayer could delay until then.
Second, if a taxpayer owes less than $100,000, the IRS provides special payment plans called Streamlined Installment Agreements that are simple for the taxpayer to obtain. These agreements require full payment of the liability and allow for six- to seven-year terms, with some restrictions. If a taxpayer owes less than $50,000, they can apply on the IRS website or mail form 9465 (Installment Agreement Request) to the IRS. If a taxpayer owes more than $50,000, they will need to call the IRS to request the agreement. The IRS will file a federal tax lien if the taxpayer’s liability is more than $50,000, and they will require the funds to be debited directly from the taxpayer’s bank account if they owe more than $25,000. A further benefit of the Streamlined Installment Agreements is that the taxpayer does not have to disclose their finances to the IRS and can obtain the agreement no matter what their current financial situation is. This is beneficial for someone who has substantial assets but does not want to liquidate them to pay the tax liability.
Third, the IRS offers resolutions based upon a taxpayer’s ability to repay the debt and not based on what the taxpayer owes. For example, we obtained a $100-a-month payment plan for a client who owed approximately $400,000. My client will never pay that debt in full because the IRS generally has ten years to collect an unpaid tax debt. When a taxpayer cannot afford to pay the IRS anything, because their necessary living expenses meet or exceed their income, the IRS would place them in a hardship status called Currently Not Collectible. The IRS agrees to leave the taxpayer alone while they are in this status and will only remove them if they have a new liability or their financial situation improves.
Fourth, the IRS allows for abatement of late filing and late payment penalties if a taxpayer can show that they have “reasonable cause” or that they qualify for an automatic reduction called a “First-Time Abatement.” Reasonable cause is a legal standard that means that the taxpayer is unable to file or pay on time through no fault of their own. Death, disability, medical issues and illness, and financial hardship are typical reasons that can be allowed. The IRS also has an automatic penalty abatement program called the First-Time Abatement. If a taxpayer has not been charged any penalties for the three prior years, the IRS will abate their penalties no matter the situation.
Finally, a taxpayer can altogether remove their liability, if they qualify, by filing an offer in compromise with the IRS or by filing for bankruptcy. An offer in compromise is the process where the IRS allows for lump-sum settlements of one’s tax liability. The rules are too complicated to cover here, but an offer in compromise can be an excellent option for some taxpayers. If a taxpayer cannot meet the strict requirements of an offer in compromise, or they also owe substantial non-tax debts, bankruptcy can also be an excellent option for them.
A delinquent taxpayer needs to realize that all hope is not lost if they have a tax liability. They are not going to prison for owing the IRS, and nothing is inherently wrong with them. Tax problems affect everyone. Many times, a taxpayer will “stick their head in the sand” and avoid dealing with the problem, which rarely works out to their benefit and only makes the problem worse for them. They are much better off dealing with the tax issue by utilizing many of the options available to them.
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