“We want to earn the trust and respect of every American.” It may surprise some to know that those words came from Congressional testimony given in the past month by IRS Commissioner Charles P. Rettig. But Rettig, himself a seasoned tax attorney in private practice until two years ago, does not make empty promises. Case in point:
Two very recent verbal announcements from high-level IRS officials in meetings with practitioners last week make clear that the IRS looks to be less of an adversary to and more of an ally with taxpayers when it comes to collecting overdue back taxes. It in anticipated that the formal guidance on the benefits discussed below will be issued next month.
Of course, those who intentionally and criminally avoid paying taxes owed will still be vigorously pursued by the IRS. In contrast, the newly-announced IRS approach to collection is for who might be called a “benign nonpayer.” Maybe you missed a filing year, maybe a few, or you inadvertently underpaid, or you were simply stumped by a new tax scenario—going from a W-2 employee to a 1099 contractor, for example.
If that is your situation, you now benefit from a truly new IRS under Commissioner Rettig. It is an IRS that seeks to encourage cooperation. Here are the key benefits and requirements you must meet to take advantage of it.
You will be allowed to enter into an installment agreement which will enable payment of back taxes within the statute of limitations (up to 10 years) without making financial disclosures (IRS forms 433A or 433F).
- You owe less $250,000, and…
- You contact the IRS prior to the case being sent out to the field for handling by a Revenue Officer. (Meaning, contact the IRS as early as possible.)
- You are current with the payments towards your current year taxes. This is part of a preference to keep current first. Often, individuals will attempt to pay off back years taxes at the risk of falling behind for a new year, such as 2020 or 2021. This is a recipe for disaster. As long as you keep current, the IRS will work with you to deal with your past liabilities.
Note, the U.S. system of taxation is a “pay-as-you-go” system. For wage-earners, that is done through withholding of your federal income taxes. For others who earn income through businesses or investments, taxes are paid through quarterly estimated taxes. To secure any installment agreement for back taxes with the IRS it requires you to be current “this” year.
- All tax returns (or at least the past six years) have been filed with the IRS.
- Although it has not yet been specified, it is my opinion that the IRS will likely require payments to be directly debited from one’s bank account.
Not having to complete financial disclosure forms is a huge give from the IRS. Financial disclosures can take forever and, for those with complex financial situations, can comprise of hundreds of pages of back-up documentation. That’s a lot of work for you and your tax representative—who remember, you have to pay to create the disclosures. Not having to do it, streamlines the process which saves time and money and gets you square with the IRS a lot faster.
In an announcement not yet made at this writing, the IRS will not make a lien determination as part of this process. Up until now, the IRS would make such a lien determination (which, in most cases would be to file the lien) for all installment agreements of more than $50,000.
Same as those listed for the first benefit. In short: If you owe taxes and want to take advantage of this new IRS attitude, you need to move fast and be thorough in meeting the requirements.
The omission of a lien determination, and the usual subsequent filing of the Notice of Federal Tax Lien (“NFTL”), is a significant benefit. Tax liens restrict you in so many ways, including placing a damper on your ability to sell a current property asset, and/or not being able to purchase an additional property. In short, while you compensate the IRS in a manner that avoids the filing of the NFTL, it is letting you do business as usual. Note, there are instances when the NFTL can be withdrawn completely, discharged against a specific property or subordinated to a new loan. However, such actions will usually require the services of a tax professional to guide you through the process.
Have a Plan
There is one other requirement that is part of this process and counts as the third of “Three Messages” our firm sends when counseling clients involved in a “tax controversy.” In fact, we maintain and I oversee a staff of 20 people who come to work every day to address one thing: to provide Peace of Mind for those facing tax controversies. Our three messages are:
- Be current with back tax payments and estimates/withholding throughout the year. And pay on time. Miss a payment, or send one late, and your installment agreement could disappear and a NFTL could be filed, basically putting you in a position that may be worse than where you started with the IRS.
- Make any and all financial disclosures required. Going forward, you may not need to do so in many cases, but if disclosures are required, accurately disclose the information requested by the IRS. However, do not volunteer information. Remember, this is the IRS you are dealing with.
- Give the IRS a plan. We did not list this in the requirements, but the IRS will expect you to come to them with a plan that answers questions such as: How much can you/will you pay in each monthly installment? Will you commit to increased installment amounts over time through a ladder-type installment agreement.
Which brings us to a final question: Why is the IRS doing this? Why the new benevolence, if one can call it that?
Simply put, making it easier for those behind on their taxes means…more taxpayers will pay voluntarily. This will free up resources to go after those intentionally refusing to pay their taxes who have the ability to do so or those who are cheating on their taxes. The IRS wants to use the carrot and the stick to change the behavior of taxpayers to ensure the stability of our nation’s revenues.
And there might be one other explanation, or at least a contributor to this new lighter touch from the IRS. According to Rettig, the IRS delivered almost 160 million stimulus checks to Americans. Many of those checks fed, clothed and helped house people, including kids. One could theorize that, for its Commissioner and others at the IRS, it felt pretty good, for once, to not be the nation’s tax collector, but the nation’s provider.