File Your Tax Return Even If You Don't Pay
Deal With the IRS When You're Down
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SAVE MONEY BY FILING YOUR TAX
EVEN IF YOU CANNOT PAY THE TAX
Let’s face it, we
all hate to pay taxes. Filing our tax returns is often painful and
time-consuming, not to mention expensive. Unfortunately, many
people encounter some type of tax problem during their lifetime.
Whether it is failing to file their taxes on time, not having the
money to pay taxes that are owed, or failing to file a tax return
for years at a time. Tax problems are common.
The best way to
avoid tax problems is, obviously, to file and pay your taxes on
time. The next best way to avoid problems is to file your tax
return or extension on time, even if you do not yet have the money
to pay outstanding taxes. The filing of the tax return will stop
hefty penalties from being assessed against you.
The penalty for
failure to file your return on time is 5% of the amount owed for
each month the return is late to a maximum of 25%!
For example: If the amount of tax owed is $10,000 and you file your
return six months late, you will be liable for the $10,000 tax plus
$2,500 in failure to file penalties plus interest. This is a rate
that would make most loan sharks foam at the mouth. Thus,
even if you cannot afford to pay your tax, you can save yourself a
significant amount of money by simply filing your return on time.
solutions where you owe taxes
Most individuals and small businesses that
encounter IRS problems are not aware that there are several
potential options available to reduce their IRS debt. Like most
things in life, even IRS taxes are negotiable.
Before the IRS will consider any negotiations
you must be up to date by filing all delinquent returns. Once your
returns are up to date you can negotiate with the IRS to abate
penalties, interest and even reduce significant tax liabilities if
payment is beyond your means.
The IRS, where
appropriate, will “abate” penalties. If a taxpayer can show “good
cause” any penalties that have been incurred may be wiped out and
the taxpayer will not be responsible to pay them. There is no hard
and fast definition of “good cause” for which to abate penalties.
All sorts of problems can fit under this term. Thus, it is
important to consult with your tax professional to discuss your
Instead of paying
the IRS everything that you owe in one big chunk, the IRS may agree
to accept regular payments to pay back taxes. A payment plan can
help you avoid embarrassing wage garnishments and inconvenient
levying of your bank account by the IRS
alternative for paying off a large tax liability is the Offer in
Compromise. This is where you make a lump sum payment to the IRS to
resolve all outstanding taxes owed. Generally, this occurs where
you are simply unable to pay back taxes. Often, an Offer in
Compromise can be made for a percentage of what you owe.
It is important
to take care of your tax problems as soon as possible.
Procrastinating only results in more penalties and interest being
assessed against you. You can deal directly the IRS, or have an
attorney or other tax-preparer represent you.
DO NOT WAIT UNTIL
TIMES ARE GOOD TO DEAL WITH YOUR IRS PROBLEMS.
Most people that stumble into
IRS problems suddenly find themselves owing thousands of dollars
without having the money to pay what they owe. They then fail to
file subsequent tax returns because they owe back taxes. This is
often the beginning of a horrible cycle that results in the IRS
assessing even greater monetary penalties and interest.
What most taxpayers do not
understand is that the very best time to deal with the IRS is when
you do not have the ability to pay the full amount owed.
"The best time to deal with the IRS is when
you do not have the ability to pay the full amount owed . . ."
Over the last several years the
IRS has become much more realistic in trying to collect taxes. The
IRS has come to the realization that it is better to receive money
now even if it is less than the full amount owed rather than to
more money you have the more the IRS will collect.
Many people that owe back taxes
and penalties believe they should wait until they have more money
before attempting to resolve their IRS problem. The problem with
waiting until you have money to deal with the IRS is that the IRS
will want as much of that money as possible to pay the taxes owed.
For example: Jim is currently
unemployed, recently divorced and his only asset is his 1982 Honda
Civic. He owes $22,000 in personal and employment taxes. Now is the
perfect time for Jim to negotiate with the IRS. Since the IRS has
become much more realistic, they understand that they are not going
to be able to collect much from Jim. Therefore, Jim is likely to be
able to significantly reduce his $22,000 tax bill. If Jim waits to
deal with his IRS problem until he is again gainfully employed and
has inherited property from relatives it is likely that the IRS will
want full payment.
Therefore, the best time to deal
with your IRS problem is before you get that high-paying job,
or inherit property. Even if you have to borrow a small amount of
money now, you may be able to save thousands over the long run and
rid yourself of tremendous stress by dealing with your IRS problem
back taxes owed are negotiable
Many people that fall behind in
their ability to pay the IRS for back taxes are unaware that they
can pay less. In fact, the IRS has set up a special program for
taxpayers that cannot afford to pay the entire amount owed on their
taxes. This program is called an "Offer in Compromise". There are
specific guidelines that the IRS follows in determining whether to
accept an Offer in Compromise. The IRS requests specific information
about your assets and liabilities in deciding whether to accept less
than the full amount owed.
The IRS may sometimes even
agree to waive penalties and interest. This, of course, depends
upon the circumstances. However, if you have gone through
particularly difficult times that made it near impossible to pay
your taxes and/or file your returns on time, a request to waive
penalties may be accepted.
It is important when dealing
with the IRS that you retain the appropriate advisor. Make sure
that you hire someone with the appropriate skills.
CAN CELEBRATE IRS RESTRUCTURING.
With the passage of the IRS Restructuring and Reform
Act of 1998, many new taxpayer rights provisions now allow
businesses to function more smoothly despite IRS audit or collection
efforts. The new law expands, clarifies, and fine-tunes many of the
most significant small-business oriented provisions in the Taxpayer
Relief Act of 1997. Some of these provisions can just be pulled off
the shelf and implemented when the need arises, while others require
careful planning in order to fully realize certain tax benefits.
The1998 Reform Act resulted in large measure
from the numerous horror stories of small businesses dealing with
IRS agents' abusive tactics. The new law attempts to level the
playing field for a small business when dealing with the IRS in
certain key areas. Here is a brief review of some of the new
provisions of the tax laws that may affect individuals and small
1. Improved procedure for IRS offers-in-compromise
where businesses and other taxpayers can negotiate a settlement of
outstanding taxes owed. These improvements include more liberal
acceptance criteria making it easier for the taxpayer to settle for
less than the full amount owed) as well as a requirement that the
IRS suspend collection activities during the compromise process or
while the taxpayer appeals.
2. Imposing procedural safeguards upon the IRS while
an issue is in the collections process. When a business is
contesting a tax liability, it frequently finds itself caught by an
aggressive IRS collecting machine where assets vital to the
continued operation of the business are seized. The new law requires
the IRS to give 30 days notice before any levy or seizure. During
this period the taxpayer can request a hearing by IRS Appeals and
immediately halt the collection process.
3. Shifting the burden of proof to the IRS in a tax
case in which the taxpayer introduces credible evidence relevant to
a disputed issue. For a case that is litigated before the tax
court, the shifting of the burden of proof cannot be
underestimated. This change should reduce a great deal of pressure
on the taxpayer and place it on the IRS. It should also make it
easier on a taxpayer to dispute a tax liability that the IRS is
claiming. Thus, it is easier to take a case to tax court.
1998 Reform Act also makes several important substantive changes to
existing tax law.
Taxes can be deferred on gain from the sale of a
business. Partnerships and S corporations can roll over gain on the
sale of qualified small business stock, provided all interests in
the partnership or S corporation are held by individuals, estates,
or certain trusts.
Ordinarily the owner of a business has to recognize
as taxable income all of the gain from the sale of the business.
For example: Joe sells his printing business this year for
$100,000. He initially invested $10,000 to get the business up and
running and took a periodic salary. Joe would typically be liable
for a taxable gain of $90,000 after the sale. Applying the 20%
capital gain rate, this would mean Joe would have to pay tax on this
gain of roughly $18,000 for the sale of his business.
The new rule allows Joe to invest the gain that would
ordinarily be taxable into a new company. This investment "rolls
over" the gain so that Joe does not have to pay taxes on the gain
until he sells his interest in the new company. This permits
tremendous tax savings on the sale of a business.
Home office deduction.
Under the prior law in order to get a tax deduction
for a home office deduction, the principal place of business had to
be the home office. A deduction could not be taken where the home
office was used only for administrative or billing purposes even
where the sole use of the home office was for the business.
Starting in 1999, taxpayers who
set up offices at home to take care of the administrative or
management side of their businesses will not be barred from
taking a home office deduction, since the home will now be
considered a principal place of business. You should be mindful,
however, that the other home office deduction rules must be followed
(for example, exclusive use for business) and the advantage of the
home office deduction should be weighed against the qualification
rules for the $500,000/$250,000 exclusion of gain on the eventual
sale of your principal residence.
Donner and Lori Donner are attorneys and partners in the law firm
DONNER & DONNER, a full-service law
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They can be reached at (805) 494-6557 or e-mailed at
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