At this time of year, there are many questions that arise regarding tax payments. This post from the Federal Taxes Weekly Alert Newsletter by Checkpoint Learning addresses one that people may not even think to ask:
As the April 18th deadline for filing 2016 income tax returns draws near, some taxpayers may encounter the issue of not having cash to pay the balance due on their returns. Penalties, but not interest, can be avoided if one can get an extension of time from the IRS to pay the tax balance. But such extensions merely postpone the day of reckoning for the period of the extension (generally, six months). The following information discusses how a financially distressed taxpayer may be able to defer paying their income taxes, including installment agreements and offers in compromise, with the 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 (https://www.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. (https://www.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); § 301.6159-1(c)(1))
Offer in Compromise (OIC). An OIC is an agreement between a taxpayer and the 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. (https://www.irs.gov/taxtopics/tc204.html)
The IRS may compromise a tax liability on any of the following grounds:
- Doubt as to liability. There must be a genuine dispute as to the existence of amount of the correct tax debt.
- 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.
- To promote effective tax administration. An offer may be accepted on this ground if: (a) collection in full of the tax owed could be achieved, but (b) requiring payment in full would either create an economic hardship, or would be unfair and inequitable because of exceptional circumstances. ( § 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)
Checkpoint Source:Federal Taxes Weekly Alert Newsletter (RIA) © 2017 Thomson Reuters/Tax & Accounting.