One of the most important steps involved with IRS Settlements is to begin making required tax payments for the current year. There are several reasons for this, but to sum it up, IRS will not extend “credit” in the form of a payment plan if they deem the Taxpayer to be a bad risk. Think of IRS as the creditor; if Taxpayer shows a pattern of behavior of owing year after year, they are a bad investment. Here are the basics that we need to work out at the very outset BEFORE we apply for the best resolution option for Taxpayer:
When setting up any of the 6 payment plans with the IRS (Yes, there are 6 types, folks), IRS will inquire as to whether or not the Taxpayer is current with this year, and if self-employed, THIS quarter.
If Taxpayer is a wage earner, IRS will want to see paystubs with the exemptions reflecting the correct amount. They will take a look at the most recent filed return as a comparison. W-4 worksheets are famously difficult to interpret, and it isn’t uncommon for clients to be claiming 5 exemptions after trying to use the worksheet, when they are only married with 1 dependent.
If Taxpayer is a self-employed Schedule C, then IRS will want the current quarter’s estimates to be paid and will base this amount on prior year’s tax return and/or current year’s profit and loss if less than the prior year’s return.
If Taxpayer is an S Corporation, then IRS will want the Taxpayer to be receiving a salary with payroll taxes withheld. Reasonable Compensation will play a factor and we will consult with RComp website, the Taxpayer’s CPA or EA, and the Taxpayers industry knowledge to determine what that should be.
Many Tax Resolution companies will have Taxpayer pay for the current quarters estimates only without explaining the long-term estimated tax requirements.
Taxpayers need to understand that if they are entering into one of the 6 payment plan types with the IRS, the payment plan will be terminated UNLESS they stop the bleeding.
What does that mean? Payment plans are not eternal plans. When a Taxpayer enters into a payment plan with the IRS, there is an unspoken agreement that Taxpayer must not incur any future obligations during the life of the payment terms. If Taxpayer sets up a payment plan with the IRS, but then files their tax return the following year and has a balance due, this will CANCEL the payment plan with the IRS.
A large percentage of my clients have previously hired a Tax Resolution company and then weren’t given any advice regarding Stopping the Bleeding. When they filed their return the following year and owed an additional amount, the IRS canceled their plan. Now the Taxpayer is back at Ground Zero. They have paid out a fee to have someone setup one of the 6 payment plans with the IRS, and they did not receive any coaching as to how to move forward. Now the Taxpayer has to choose to hire another Tax Resolution company to do the same process all over again, or choose to DIY (Do-It-Yourself). This is a sad state, since the due diligence in my humble opinion lies with the Tax Resolution company to at least advise the Taxpayer of their obligations to remain in the payment arrangement.
We love having our client’s Tax Preparers involved so that we can hand off the client after we setup the Settlement Plans knowing that the clients are in good hands.
Tax Planning becomes essential for these Taxpayers to ensure enough is estimated for current and future years so compliance can be maintained.
It feels rewarding for me when I know that all my hard work can result in Stopping the Bleeding once and for all!
Renee Sieradski, EA