What if your client cannot pay taxes in time? As a tax advisor, you do your best to ensure your clients are not in for any unpleasant surprises when handing in their completed tax returns. However, there might be an increasing number of clients who owe money to the IRS for taxes, but do not have enough cash on hand to pay the taxes on or before April 15th. If a return is not filed in time, the client will face penalties and interest on the unpaid tax bill apart from the 5% per month penalty for failing to file on time. Interest is usually charged on any unpaid tax from the return’s due date until the date of payment. The interest rate is the federal short-term rate plus 3% set every three months, with the interest compounded daily.
Interest is also charged on late-filing penalties. If your client files on time but does not pay the total amount due, a late-payment penalty would be payable. This is .05% of the tax owed per month or part of a month until the tax is paid in full. The client will be charged up to a maximum penalty of 25% of the tax due.
The .05% rate increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. If your client files by the return due date, the rate decreases to .025% for any month an installment agreement is in effect. However, that interest rate fluctuates.
If other options are not available, a client can request an installment payment agreement from the IRS. Here too, interest and penalties continue to accrue until the tax is paid in full. In addition, the IRS charges a one-time user fee for setting up an installment agreement. Generally, the fee is $105, but reduced to $52 for direct debit agreements under which the agreed upon payments are automatically deducted from the client’s bank account. The fee may be reduced to $43 for lower-income individuals.
The IRS’s ‘Fresh Start’ initiative provides an option for a streamlined installment payment agreement when the tax and penalty / interest liability is $50,000 or less. The maximum term is 72 months and the minimum monthly payment is $25. If the total amount due is greater than $25,000, but not more than $50,000, the client must agree to a direct debit agreement to qualify without submitting a financial statement. If not paying by direct debit, he / she must complete Form 433-F, Collection Information Statement.
Streamlined agreements are available to small businesses with $25,000 or less in unpaid liabilities giving 24 months to pay by direct debit. The IRS generally will not take enforced collection actions, such as levying on a client’s wages or bank accounts, when an installment agreement is being considered or in effect, for 30 days after a request is rejected, or during the period the IRS evaluates appeal of a rejected or terminated agreement.
A client struggling to make ends meet may qualify for an offer in compromise. An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Except some special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets. A streamlined offer in compromise program, involving fewer requests for financial information and greater flexibility in determining ability to pay, may be available for taxpayers with annual incomes up to $100,000 and tax liabilities of less than $50,000.
The bottom line is that even if your client cannot pay the taxes due; ensure the problem is not compounded by failure to file the tax return. The client could end up paying penalties totaling half the amount due, even before interest is even added on.
Contact our tax experts at info@gkmtax.com for more in-depth tax advice.