Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

April 1, 2016

After more than a year, our Back to Basics series has come to an end.  We covered the 1040, all the major Schedules (A, B, C, D, E, and F) and 27 of the most common forms.  To access any articles from the past you can read them on my website atwww.tlongcpa.com/blog .

For our last article, we have some wonderful news!  The IRS recently announced that starting next year, on a three-year trial basis, they are moving to a voluntary income tax system.  You will be asked to pay what you feel is fair and what you can afford, but there will be no requirement to actually pay income tax.

If you haven’t picked up on the date of this publication yet, it is April Fool’s Day;  this utopian ideal will have to sit on the shelf a little longer!  But, if you do find yourself in a situation where you owe more than you can manage to part with by the due date of April 18th, there are some options for you.  Remember that even if you file an extension, the tax is still due by April 18th this year.

The IRS says that if you can pay your balance due in full within four months of the April 18 due date you can simply call them at 800-829-1040 and advise them of this.  You will still have to pay interest (currently 3 percent per annum) and penalties (0.5 percent of the unpaid balance per month – effectively another 6 percent per annum) until paid in full, but you will not have to setup an installment agreement…which is your next option.

If you think you will need more than four months to pay off the balance, then you need to set up an installment agreement to avoid letters threatening actions such as liens, asset seizure, and taking your first-born child.  Well, maybe the first-born child part is a little overdramatic.  Even the concept of seizing assets, although splashed across notices relatively early in the collection phase, is hardly ever a reality, and you would likely have to have a $100K or more tax bill before they would consider taking and selling off your assets.  Wage garnishments and liens do happen more often, however.

An advantage to an installment agreement, is that it cuts the late payment penalty in half – from 0.5 percent per month to 0.25 percent per month.  There is a $120 charge from the IRS to setup and installment agreement, but I recommend you have direct debit setup to take the payment directly out of your bank account each month.  This reduces the fee from $120 down to $52.  It also prevents you from accidentally missing a payment.  If you fail to make a payment, you can be kicked out of the program, and have to reapply, and pay a new fee.  Also, if you have a balance from an old year, and you need to add to it, you generally have to setup a new installment agreement as well.

You can file for an installment agreement using IRS Form 9465.  This can be e-filed with your tax returns, or mailed by paper.  Or, you can set it up online at http://www.irs.gov.  If you owe less than $25,000, you will generally be approved without any hassle, as long as you have a good filing history.  You can take the balance owed and divide by up to 72 months.  I generally recommend that you keep the monthly commitment low so you know you will not fail to be able pay some month and then get kicked out – but go ahead and make extra payments whenever you can to pay it down faster.  Even if you owe up to $50,000, you can still get automatic approval, but you will need to fill out page two of the 9465 that asks a few more financial questions.

If you owe over $50,000, then you also have to send in a 433-F Collection Information Statement.  This has a lot more specific questions about your finances, and is pretty much like providing personal financial statements.

California has a similar installment agreement process, but the amounts and rules differ a bit.  California generally only allows an automatic installment agreement if you have up to $10,000 of unpaid tax liability.  You can go up to $25,000, but you have to show that you have a financial hardship (not by your definition, however!).

The late payment penalties are five percent of the total unpaid tax liability during the first month, and then 0.5 percent each month thereafter until paid in full (capping at 25 percent like the federal does.)  The interest rate is currently the same as the federal three percent rate.  The fee to apply is $34, and you must pay off the balance in less than three years.  I typically recommend just paying the FTB off, if possible, and then only dealing with the IRS on one installment agreement.

The California installment agreement request is made on Form 3567.  You can also fill it out online at ftb.ca.gov by choosing “Installment Agreement” under the “Pay” section.  Your other option is to call the FTB at 800-689-4776.

Finally, there are also options for an offer in compromise, if you clearly will not be able to pay off your tax debts in the future based on your income and certain expenses.  The process is fairly mechanical, and you generally will either qualify or you will not.  It is not like you sit around and negotiate the amount.

Be wary of ads you see on TV or on the radio that talk about getting rid of your tax debts.  A retired collection officer at the IRS of 30 years once told me that many of these groups charge you fees go through all the work to fill out the forms and gather the information whether or not you even have a remote chance of qualifying.  Then you simply get rejected, and you are in a worse position than when you started.  Instead, they could do some preliminary analysis, and not generate a lot of busy work for themselves.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.