Originally published on Forbes.com April 7th, 2014
If you are facing a large balance due this April 15th and don’t know where the money to pay it is coming from, you may be starting to panic. Go ahead and scream and yell a bit or whatever it takes to get it out of your system, then take a deep breath and read the rest of this post. Unenviable as your situation is, it is not dire. There will not be a team of IRS commandos surrounding your house and auctioning off all your possessions on April 16th. You can start working your way into a situation like that if you start making bad decisions, but it will take years and quite a few bad decisions.
Two Different Systems
Here is the most important thing you need to understand. There are two very distinct sections of the IRS that are of concern to folks like yourself. One is concerned with processing and examining your return to determine your correct tax. Once they are done, there is an entirely separate group that concerns itself with actually collecting the tax from you.
Most tax advisers focus on getting your return, including structuring things to legitimately minimize your liability, right. Representing you at an audit and even litigating are an extension of this process. The underlying assumption is that ultimately you will get a bill and pay it. It goes without saying that you will want to take a close look at your return to see if there is a way to reduce that balance due. In principle, though, you would want to put the same effort into a return where you were getting a refund. For purposes of this discussion, let’s assume that there is no brilliant maneuver that can bring your balance due down to an amount that you can write a check for. What do you do?
For The Do It Yourself Crowd.
What you can do is file your return and request a payment plan. If you owe less than $50,000 you apply for a payment plan on-line. The fact that there is an on-line option should give you comfort that you are not the first person that this has ever happened to. If you owe $50,000 or more you will need to file Form 9465 and will also need Form 433-F.
I spoke with my friend Mark Stanhope, who practices in the collection area quite a bit. He told me the on-line payment plan usually works out to 72 months. Presumably, you can pay it off earlier to save interest, when your ship finally comes in.
If You Need Help
The main reason I spoke to Mark is because he is my go-to guy on collections issues. I even sent him someone whose Tax Court case I wrote about. Mark used to work with me on affordable housing audits, but he moved on and learned the collection ropes from the late Murray Hershman, who was famous in the city of Worcester for his WTAG Tax Minute, which I used to catch while listening for the school closings.
Only a small minority of tax practitioners are any good at collections work, so don’t count on your regular tax preparer being able to help you. The field has been polluted by some heavy TV advertising mountebanks, who charged a lot of money for doing next to nothing. So how do you get help?
Mark told me about American Society of Tax Problem Solvers. They provide the credential – Certified Tax Resolution Specialist.
The services a CTRS provides to individuals and businesses include securing Offers In Compromise, Installment Agreements, Penalty Abatement, Innocent Spouse Relief, Release of Liens or Levies, Non-Filer issues and many others.
The designation is only awarded to CPAs, attorneys and Enrolled Agents. You may also be able to find someone by networking, but be cautious, as most people do not understand the distinction between regular compliance work and collections work.
Be Sure To File Your Return
One of the most common errors that people make is waiting until they have the money to pay before filing their return. That is very bad idea because as bad as interest and late pay penalties are, the late file penalty is brutal. 5% a month maxing out at 25%.
Should You Extend?
You can request an extension of time to file even though you don’t have the money to send in with it. This gets you out of the late file penalty, although it does not help with interest. The other advantage of going on extension is that it will be six months longer before your payment plan commences.
What About Joint Returns?
Joint returns usually produce an aggregate tax liability lower than two separate returns, but there is a funny thing about liabilities that are more than you can pay. Once the liability is way more than you can pay, it does not really matter how much more it is.
Consider Robin and Terry. Robin is a teacher with an adequately withheld W-2 of $60,000. Terry is a partner in a partnership that had a great year in 2013. Terry has a K-1 showing $300,000. Unfortunately, the partnership had a disastrous first quarter in 2014 and the usual April distribution will not be forthcoming. With separate filing, Terry can apply for a payment plan that does not consider Robin’s earnings. It is possible that Terry’s liability will be deemed not currently collectible. Joint filing creates joint and several liability making Robin’s steady paycheck fair game. If things ever get straightened and money starts flowing from the partnership, Robin and Terry can amend to a joint return.
The separate filing strategy does not work so well in a community property state.
What Not To Do
As you have been scouring the internet for help with your problems, you have probably found material that indicates that most regular Americans don’t really have to pay income taxes. The whole thing is an elaborate ruse. Although people keep coming up with new views on this, probably the best worked out one was put forth by Irwin Schiff.
Irwin Schiff has an analysis of several Supreme Court decisions in the decades surrounding the 16th Amendment that lead to the conclusion that the income tax applies to a very limited set of transactions. I have read his book (and others) and the cited decisions, in full, and am not convinced, but, of course, I’m just a CPA and you probably figure I’m invested in the system since I have made my living off it.
I have also spoken to Irwin Schiff’s sons, Peter and Andrew. They both believe that their father’s interpretation is correct. They, however, do not recommend that you emulate him, because the federal judiciary has uniformly ruled against interpretations like Irwin’s. Irwin is in federal prison and the next birthday he will celebrate in freedom will be his ninetieth.–
You can follow me on twitter @peterreillycpa.