Okay, let’s talk about how to get the IRS to agree to a payment plan for the back taxes you owe. Malcolm C. from Lexington, KY writes to me asking how he can set up a payment plan with the IRS for his $19,000 tax debt.
Let’s first review some of the facts of the case:
1. Malcolm owes two years; 2003 and 2004.
2. All of your tax returns are filed.
3. Not subject to a current lien/garnishment.
4. You owe no business taxes, only personal.
It turns out that Malcolm declared himself “exempt” on his 2003 and 2004 W-4s to try to get some extra money. And now the IRS wants the money from him. The IRS wants Malcolm to pay $753 per month on a payment plan. But he can only afford to pay $400 per month. What are his options? This is a very common scenario that I see over and over again with my clients.
First of all, you will never get away with claiming “exempt” on your W-4. Eventually, he will always have to pay the piper (plus penalties and interest). In almost all situations, the additional money he earned during the exemption period is simply not worth the inconvenience and expense he experiences later. If the IRS wanted to get super technical about it, they could probably get a criminal tax fraud charge upheld by claiming that you knowingly and willfully withheld your income taxes. However, the chances of him even being investigated (let alone prosecuted) are slim to none in a case like this. Bottom line: just don’t do it.
SOLUTION: The best thing Malcolm can do is call the IRS ACS (Automated Collection System) line at 1-800-823-1040 and request a “Simplified Installment Agreement.” A simplified payment arrangement is available to any taxpayer as a matter of right if they owe less than $25,000; file all your tax returns; and only personal income tax debt (without business payroll debt). The simplified installment agreement is calculated by taking your total tax liability (in this case, $19,000) and dividing it by 60 months. So, Malcolm is considering a monthly payment of about $320 to $325 per month for the next five years (60 months) that he can set up with the IRS ACS unit.
The benefit of a simplified installment agreement is that the IRS will not levy or levy you while you are on the payment plan. It becomes another monthly bill and you only pay it for the next five years (in reality, it will be a little over 5 years, as penalties and interest will continue to accrue). The IRS now reserves the right to file a federal tax lien even if you’re making payments to preserve your interest in the debt until it’s paid in full, so don’t be surprised if this happens. Remember that a Link and a Levy are two different things. The link will not take your money, salary or property. It just sits on your credit report until the debt is paid.
In addition, you must ensure that you comply with the regulations in the future. Any default will put the deal in default and then all bets are off. The IRS defines “compliance” in this case as making sure all your returns are filed on time (usually by April 15) and don’t create new balances (all taxes are paid by April 15 of the previous year). . Good luck Malcolm. in a future post I will explain to you how you can get a reduction in a similar case causing penalties and interest on penalties to be eliminated.