Okay. Let’s talk about how to get the IRS to accept a payment plan for the back taxes you owe. Malcolm C. of Lexington, KY wrote to me asking how he could arrange a payment plan with the IRS for his $19,000 tax debt.
Let’s review some facts from the case first:
1. Malcolm is in debt for two years; 2003 and 2004.
2. All tax returns are filed.
3. He is not under levy/garnishment at this time.
4. He owes no business taxes, only personal.
Turns out Malcolm claimed to be “excluded” on his W-4 for 2003 and 2004 to try to get some extra cash. And now the IRS wants their money. The IRS wants Malcolm to pay $753 per month for the payment plan. But he can only afford to pay $400 per month. What are the options? This is a very common scenario that I see time and time again with my clients.
First of all, you will never get away with claiming “excluded” on your W-4. In the end you will always have to pay the piper (plus penalties and interest). In almost every situation, the extra money you earn during the exclusion period is not worth the hassle and expense you will incur later. If the IRS wants to get super technical about it, they may be able to file criminal charges for tax fraud by claiming that you knowingly and knowingly withheld your income taxes. However, the chances of you even being investigated (let alone being charged) are virtually non-existent in a case like this. Bottom line: Don’t do it.
SOLUTION: The best thing Malcolm had to do was call the ACS (Automatic Collection System) IRS line at 1-800-823-1040 and ask for a “Simplified Installment Agreement”. The Simplified Installment Agreement is available to every taxpayer as an entitlement if you owe less than $25,000; have all your tax returns filed; and only owed for personal income tax (no business payroll tax payable). The Simplified Installment Agreement is calculated by taking your total tax liability (in this case $19,000) and dividing by 60 months. So Malcolm is looking for monthly payments of about $320 to $325 per month over the next five years (60 months) that he can set up with the IRS ACS unit.
The benefit of the Simplified Installment Agreement is that the IRS will not charge or embellish you as long as you are on a payment plan. That becomes another monthly bill and you only pay it for the next five years (it will actually be a little longer than 5 years because the penalties and interest will still add up). Now the IRS has the right to file a Federal Tax Lien even if you make payments to keep their interest in debt until it’s paid in full, so don’t be surprised if this happens. Remember Lien and Levy are two different things. A lien will not take your money, your wages, or your property. It just sits on your credit report until the debt is paid.
Also, you need to make sure that you stay compliant for the future. Any non-compliance will make the agreement default and then all bets will be void. The IRS defines “compliance” in this regard as ensuring all your returns are filed on time (usually April 15) and that you are not running a new balance (all taxes paid April 15 for the previous year). Good luck Malcolm. In future articles I will explain how you can get subtraction in the same case by waiving the penalty and interest on the sentence.