The ABCs of Late IRS Payments

The complexity of the tax laws and the fact that they change from year to year makes it inevitable that some clients will be unable to pay some or all of their bills to the Internal Revenue Service.  Others may be able to afford the bill, but need more time to complete the return or gather information for a professional to assist them. 

When this happens,  there are straightforward procedures to both file the tax returns and make payments. 

The IRS itself advises taxpayers not to panic -- tax-filing extensions are available to taxpayers who need more time to finish their returns.  This is an extension of time to file; not an extension of time to pay. However, taxpayers who are having trouble paying what they owe may qualify for payment plans and other relief. 

There are three basic steps that the taxpayer needs to take – what we might call the ABCs of late IRS payments: 

A.      File a return by April 15, or a request for an extension.
B.      If the taxpayer is unable to pay the full amount, pay an estimated amount or as much as possible.
C.      Enter into an agreement with the IRS to pay the remainder. 

File a return or request for extension 

Taxpayers will avoid stiff penalties if they file either a regular income tax return or a request for a tax-filing extension by the April 15 deadline. Taxpayers should file a return even if they can’t pay the full amount due. 

Here are the options available: 

• People who haven’t finished filling out their return can get an automatic six-month extension. While taxpayers can find the form and submit it themselves, professional tax preparers can also provide assistance in filing an extension using IRS Form 4868.  Of the more than 12 million extension forms received by the IRS last year, over 7 million were filed electronically by professional preparers.  Filing this form gives taxpayers until October 15 to file a return.
• Be aware that the IRS corrected this form on January 4, 2014.  The corrections alter the instructions for submitting the form:
   
  • On page 4, in the Where To File a Paper Form 4868 section, preparers who are mailing Form 4868 and making a payment for customers who live in Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New York, Pennsylvania, Rhode Island, Vermont, or West Virginia, need to send the form and payment to:
    
    
    Internal Revenue Service
    P.O. Box 37009
    Hartford, CT 06176-7009 
  • Customers mailing Form 4868 and not making a payment AND who live in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, or Wisconsin, should send the form to:
    
    Department of the Treasury
    Internal Revenue Service Center
    Fresno, CA 93888-0045
    
    
• To get the extension, taxpayers must estimate their tax liability on this form and should also pay any amount due.  By filing this form, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance that applies to returns filed after the deadline. In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 15. The interest rate is currently three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.
   
• US citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the US, have until June 16 to file. Tax payments are still due April 15.  Tax rules for members of the military are found in IRS Publication 3, the Armed Forces Tax Guide.  Members of the military and others serving in Afghanistan or other combat zone localities can wait until at least 180 days after they leave the combat zone to file returns and pay any taxes due.  For a current list of combat zones that qualify, see the IRS page here.
• People affected by certain recent natural disasters are also given extensions for filing.  A list of qualifying disaster areas can be found here.

Making Payments 

Taxpayers with a balance due now have several quick and easy ways to electronically pay what they owe. They include: 

• Write a check or send a money order.  The taxpayer should make the payment out to the “United States Treasury.” Write “2013 Form 1040,” name, address, daytime phone number and Social Security number on the front of the check or money order. To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher. 

• Pay by credit or debit card.  Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors.  Drake offers this service through a standalone website (www.1040paytax.com), and through the Integrated File & Pay method within its tax software.  Though the IRS does not charge a fee for this service, the card processors do. For taxpayers who itemize their deductions, these convenience fees can be claimed on Schedule A, Line 23. 

• File electronically and pay through electronic funds withdrawal.  Once the return is accepted, information pertaining to your payment, such as account information, payment date or amount, cannot be changed. If changes are needed, the only option is to cancel the payment and choose another payment method.  Information about filing electronically and current guidance from the IRS can be found here.
   

If the Taxpayer Can’t Pay 

Taxpayers struggling with unpaid taxes qualify for one of several relief programs, including: 

• A payment agreement.  Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months. Fees apply, and vary based on payment method.  Fees are listed in instructions and on the OPA page.  Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. With the Online Payment Agreement, no paperwork is required, there is no need to call, write or visit the IRS, and qualified taxpayers can avoid the filing of a Notice of Federal Tax Lien if one was not previously filed. Alternatively, taxpayers can request a payment agreement by filing Form 9465. This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice. 

• Some taxpayers may qualify for an offer-in-compromise. This is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.
   

The Offer in Compromise 

An offer in compromise allows the taxpayer to settle a tax debt for less than the full amount owed. Payments made under an Offer in Compromise are non-refundable, and may not prevent the filing of a Federal Tax Lien.  However, this procedure suspends other IRS collection activities. 

The Offer in Compromise may be a legitimate option for those who can't pay their full tax liability, or if doing so creates a financial hardship. The IRS considers each unique set of facts and circumstances, including: 

• Ability to pay;
• Income;
• Expenses; and
• Asset equity. 

The IRS will generally approve an offer in compromise when the amount offered represents the most they can expect to collect within a reasonable period of time.  An offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date. 

Taxpayers must be current with all filing and payment requirements to be eligible, and cannot be in an open bankruptcy proceeding. The IRS provides an Offer in Compromise Pre-Qualifier to confirm eligibility and prepare a preliminary proposal. 

Step-by-step instructions and all the forms for submitting an offer are contained in the Offer in Compromise Booklet, Form 656-B.  The completed offer package will include: 

• Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms; 

• Form 656(s) - individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656; 

• $186 application fee (non-refundable); and 

• Initial payment (non-refundable) for each Form 656. 

The initial payment will vary based on the offer and one of two payment options: 

• Lump Sum Cash: An initial payment of 20 percent of the total offer amount is submitted with the application. Once accepted by the IRS, the remaining balance is paid in five or fewer payments. 

• Periodic Payment: An initial payment is submitted with the application, and monthly installment payments are made while the IRS considers the offer. If accepted, continue to pay monthly until it is paid in full. 

Taxpayers who meet the Low Income Certification guidelines do not have to send the application fee or the initial payment and will not need to make monthly installments during the evaluation of the offer. 

Filing Past Due Tax Returns 

Taxpayers who have failed to file and/or pay taxes in previous years should do so immediately in order to avoid further interest and penalties; claim a refund for the previous period; and (for the self-employed) to protect credits toward Social Security retirement or disability benefits. 

Taxpayers who cannot pay what they owe can request an additional 60-120 days to make payment in full through the Online Payment Agreement application or by calling 800-829-1040; no user fee will be charged. If you need more time to pay, you can request an installment agreement or you may qualify for an offer in compromise. 

If the taxpayer fails to file a return, the IRS may file a substitute return on its own. This return might not include credit for all deductions and exemptions. The IRS will send the taxpayer a a Notice of Deficiency CP3219N (90-day letter) proposing a tax assessment. The taxpayer will then have 90 days to file the past due tax return or file a petition in Tax Court. If the taxpayer does neither, the IRS will proceed with its proposed assessment. Taxpayers who have received a notice CP3219N letter cannot request an extension to file.  

If the IRS files a substitute return, it is still in the taxpayer’s best interest to file his or her own tax return to take advantage of any exemptions, credits and deductions. The IRS will generally adjust the account to reflect the correct figures. 

Collection and enforcement actions 

The return the IRS prepares -- its proposed assessment -- will lead to a tax bill, which, if unpaid, will trigger the collection process. This can include such actions as a levy on wages or bank accounts, or the filing of a notice of federal tax lien.  Information on IRS levies can be found here, and information on federal tax liens here. 

Taxpayers who repeatedly do not file could be subject to additional enforcement measures, such as additional penalties and/or criminal prosecution. 

Taxpayers who experience a hardship and can’t file a past due return can call or write the local state Taxpayer Advocate Office.