As the April 15th deadline for filing 2018 income tax returns draws near, practitioners may encounter some clients who don't have cash to pay the balance due on their returns. Clients can avoid penalties but not interest if they can get an extension of time to pay from IRS. Financially distressed clients may be able to defer paying their income taxes, including installment agreements and offers in compromise with IRS.
Paying in full within 120 days (short-term payment plan). 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 (IRS website) or call IRS at 800-829-1040.
Installment agreements (long-term payment plan). 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. (IRS website)
There are different installment agreement 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 under Code Sec. 6159 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); Reg. § 301.6159-1(c)(1)).
Despite the last condition, the Internal Revenue Manual 184.108.40.206, notes that as a matter of policy,
IRS grants guaranteed installment agreements even if the taxpayer can pay his or her liability in full.
There's a streamlined procedure for granting agreements for payment of tax in installments for amounts of $50,000 or less. IRS may accept streamlined installment agreements without requiring financial statements or managerial approval if the taxpayer
- has an "aggregate unpaid balance of assessments" (tax, assessed penalty and interest) of $50,000 or less,
- has filed all returns, and
- will pay up within 72 months, or will pay in full before expiration of the collection statute of limitations, whichever comes first. (IRM 220.127.116.11, IRS website)
Remember to FILE YOUR RETURN,
Even if You CANNOT Pay Your Tax!
I know this is counterintuitive, since no one wants to bring attention to the fact that they cannot pay their taxes by filing a tax return showing a tax due and not paying the tax. However by filing your return,
- You begin the running of the Statute of Limitations for assessment & collection,
- You begin the running the two-year period for discharging this debt in bankruptcy and
- You reduce your associative tax return penalties from 5% a month for late filing to .05% for late payment penalty.
- The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
- If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.