There is very little mercy in the tax code. One of the provisions, however, offers the taxpayer who has had some difficult times a bit of relief. It’s called the statute of limitations on the collection of a tax debt. In general, the IRS has 10 years to collect a past due debt. (Internal Revenue Code Section 6502). After 10 years, the debt is wiped out. There are a number of ways that the statute can be extended, though.
- The 10 year period does not start to run until you file your return and the IRS assesses the tax against you. Not filing a return and hiding for 10 years accomplishes nothing.
- The IRS can extend the 10 year period by suing you in Federal court. The IRS usually won’t do this and if it’s getting close to the 10 year mark and you don’t owe millions, the IRS may let the statute expire and you’re off the hook forever.
- Certain actions on your part may extend the 10 year statute: Some examples are as follows:
- Filing an Offer in Compromise
- Living outside of the United States
- Requesting a Taxpayer Assistance Order
- Signing a Waiver Form
- Requesting a Due Process Hearing
If you owe taxes but can’t pay in full, there options for you. Most importantly, make sure you file your tax return and pay as much as you can. Then let the us help you choose your best option to pay. Here are some options to consider, even if you can’t pay the full amount right now:
- Borrow the money. If you don’t have the money to pay all your taxes now, then you may want to get a loan from a bank or other source. The interest rate may be lower than the interest and penalties the IRS charges on late taxes. You also may be able to borrow against your assets or sell them to raise cash.
- Make an Online Payment Agreement. If you are unable to pay in full, then consider paying over time. If you owe $50,000 or less, you can apply for an installment agreement. You may choose to make convenient monthly direct debit payments for up to 72 months. With this option, there are no checks to write or send. And you won’t miss a payment or pay late.
We can also help if your tax debt is more than $50,000 or you need more than six years to pay. In these cases, the IRS may ask for further financial information. See Form 433-A or Form 433-F, Collection Information Statement.
- Offer in Compromise. An Offer in Compromise is an agreement that allows you to settle your tax debt for less than the full amount. Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable time. The IRS looks at several factors to make a decision on your offer.
Figure Your Withholding. The IRS Withholding Calculator tool can help you avoid having too much or too little income tax withheld from your pay. You can use it anytime throughout the year to stay on target.
Year Round Tax Tips
With the end of the year just around the corner, I get quite a few calls from clients and potential clients about what they should do to plan for year end. Tax planning is a year round activity, not something we try to accomplish in the last week of the year, although there are things we can do to mitigate tax before the ball drops in Times Square.
- Start a filing system. If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, which is better than nothing (not much) but it can cost you quite a bit more for a tax professional to go through and decipher. We recommend a more complex yet effective approach like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.
- Make Charitable Contributions. If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2016. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2017. A gift by check also counts for 2016 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. Once again, save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats.
If you are age 70½ or over, the qualified charitable distribution allows you to make tax-free transfers from your IRAs to charity. You can give up to $100,000 per year from your IRA to an eligible charity, and exclude the amount from gross income. You can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2016. This benefit is available even if you do not itemize deductions. This special provision is set to expire at the end of 2016.
- Contribute to Retirement Accounts. You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2016. On the other hand, you have until April 15, 2017, to set up a new IRA or add money to an existing IRA and still have it count for 2016.
The tax code sets out time limits, or statutes of limitations for the IRS to pursue non-filers.
Criminal – The IRS can only bring criminal charges against a non-filer within 6 years of the due date of the return.
Civil – There is no deadline, however, on the IRS going after non-filers and imposing civil penalties, in addition to taxes owed. This means that while you can’t be put in jail for not filing a 1988 tax return, you will forever owe the IRS a return as long as you have earned enough to have had an obligation to file. Also, you will be fined with penalties and be required to pay interest on the unfiled returns forever. The IRS may file an SFR (substitute for return) on your behalf based upon the data they have which is never a favorable situation for a taxpayer.
Substitute for Returns
The IRS has the ability to prepare and file returns for you if you choose not to file (Internal Revenue Code 6060). This is commonly known as an SFR. In most cases, it is a disadvantage to have the IRS do this. Typically, the IRS will allow you one exemption, no dependents, and only allow the standard deductions on the return they file for you. Furthermore, the IRS will calculate your tax liability for you, usually from your W-2s and 1099s. The IRS may also impute income to you based upon tabled furnished by the Bureau of Labor Statistics showing the income necessary to sustain the lifestyle in your community. This can result in a much higher tax bill than you would have had if you or a professional prepared your return.
If the IRS prepares an SFR, it will mail it to your last known address asking you to sign it and return it. It may not be in your best interest to sign such a return and if this does happen to you, you should contact a tax professional immediately.
In the event you are ever audited by the IRS, here are some recommendations:
- Keep the IRS from holding the audit at your business or home. Instead, engage a professional and meet at the IRS office or at the tax professional’s office.
- Five the auditor no more information than he or she is entitled to. Do not talk during the course of the audit any more than necessary.
- The IRS must complete and audit within 3 years of the time your tax return is filed, unless the IRS finds tax fraud or a significant underreporting of income (Both of which extend the deadline).
- If you are missing receipts or other documents, you are allowed to reconstruct records.
- When you receive an audit report, call the auditor (or have your representative do it) if you don’t understand or agree with it. If necessary, have your representative meet with the auditor’s manager to see if a compromise can be made.
- If you can’t live with an audit result, you may appeal within the IRS or file a petition to go to tax court.