If your client has a tax liability and has heard nothing yet from the IRS, what’s the next move? Do you slap them on the back and say, “Whew! Good job. You dodged that bullet!”
You advise them to schedule and appointment immediately to deal with it. They won’t be flying under the radar for long!
Where do you start? Is it better to pay current 2017 liabilities rather than try to pay off the back years first?
Before the IRS can consider a tax settlement or a payment plan, a taxpayer’s first step is to file all required returns (even if they owe). This means they must be current with estimated tax payments or withholding. Negotiating with the agency commences once taxpayers are deemed in “current compliance” with their federal tax liabilities. Compliance means that all returns have been filed and all payments for the current year have been made.
Is there any way around this? Nope. The agency will demand that these prerequisites are met, and once they are, good will is established with the IRS. This will help to facilitate a favorable outcome of a tax dispute should one arise.
Most taxpayers need to pay their taxes throughout the year. However, if they are employed and they have a large federal tax balance then it’s probably a good idea to review their withholding election.
What options does your client have when there’s a large amount of tax liability? In this case, you may want to advise them to make some changes at work. What? Leave a job for a lesser paying gig?
No! But they may need to increase the amount of taxes being withheld from each paycheck. Changing the Form W-4, Employee’s Withholding Allowance Certificate, with an employer will help to prevent recurring tax liability in future years.
Estimated Tax Payments
If your clients do not have taxes withheld from their income and they don’t want to be zapped with a huge tax liability, he or she may find it helpful to make estimated tax payments. This could apply in cases where clients are self-employed, or may apply when they earn interest, dividends or have capital gains. It could also apply if lesser than needed taxes are withheld from wages.
If your clients are required to pay estimated taxes during the year, advise them to make these payments to avoid penalties. In situations where the client is self-employed, advise him or her to be sure to make all estimated tax payments to avoid owing the IRS on tax day.
Remember: it is always easier to deal with the IRS if you are in compliance with all paying and filing requirements. Compliance means that all returns have been filed and all payments for the current year have been made.
If your client cannot pay the total tax liability in full, you can request an installment agreement to pay the amount due in monthly installment payments. The IRS will charge a one-time user fee.
The IRS will allow you to set up various types of agreements to pay off the balance. This can be done online by submitting the proper forms or
by submitting an Offer in Compromise (OIC). An offer in compromise is a process that allows a taxpayer to offer the IRS less than what is owed and the IRS agrees to write off the balance due.
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