I write this because I meet with a lot of clients in my office who owe the IRS back taxes and they don’t understand why the IRS cancels their payment plan every year.
The answer is simple and yet, few people that come into my office know the simple truth : When you setup a payment plan with the IRS, you cannot continue to owe taxes on your future tax returns. If you do, your payment plan will be cancelled.
So what this means to wage earners is that you have to increase your paycheck withholdings. Let’s face it, the W-4 worksheet from the IRS is downright confusing and causes folks to pick the wrong number of exemptions. So here is an easy rule of thumb if you are trying to correct your federal tax withholdings on your paycheck so that you stop the bleeding and don’t continue to owe year after year on your tax return: Claim yourself and claim any dependents that no one else is claiming. If you are married and have children, only you or your spouse can claim the child, not both of you.
Here’s an example: Bob and Cindy are married with 1 daughter, Sylvia. Both Bob and Cindy work as wage earners and have taxes withheld from their paychecks. Neither of them have any other sources of income. So, Bob claims himself and his daughter (2) on his paycheck withholdings. Cindy claims herself on her paycheck withholding. (1)
If you are reading this and realize that you are claiming too many dependents, then an easy fix is to download a W4 from IRS.gov and change line 5 to the correct number of dependents.
Another option is to ask your tax preparer how many dependents you should deduct on your paycheck.
Also if you have side income such as from a side job, claim less so that you can have taxes withheld for that income.
And remember that claiming too many dependents as a way to increase your pay is like playing with fire. It will catchup with you and the IRS will pile on interest and penalties.
A strategy that all seasoned tax resolution advisors use when negotiating with the IRS is to begin with the present. What this means is that we start with today and stop any future tax liabilities. So it is quite common when I meet with a potential client that I will adjust their paycheck withholdings in the initial consultation so that they will have the correct amount withheld on their paycheck moving forward. This is one of the first things that the IRS will look at when approving a coveted Offer in Compromise; Is the Taxpayer currently having enough taxes withheld today, in real time.
So to summarize, If you file your 2017 tax return and your current payment plan with the IRS goes into default, it is likely because your 2017 tax return had a balance due. The solution to prevent this from happening is to 1) correct your paycheck withholdings so you aren’t having too little taxes withheld and 2) pay what you owe with your 2017 tax return to keep your current Installment Agreement in place.
If you would like to read more on the subject, download our free mini ebook:
How to End your IRS Problems FOREVER