By Hal S. Margolit, CPA/MST
October 15th was the final filing deadline for 2007 extended Federal personal income tax returns. Perhaps you know of clients that should have filed and missed the deadline. Maybe their reasons for nonfiling were that there is a large amount due and they cannot afford to pay it now. Or perhaps, they are still waiting for information with which to prepare their return. As CPAs and tax professionals we can provide a valuable service and offer needed guidance in helping these people get back into compliance.
Late filers who owe tax are subject to late filing penalties, late payment penalties, and interest on the amount due. The IRS can assess two separate penalties if a taxpayer does not file his tax return and owes income tax; the failure to file penalty and the failure to pay penalty. The harsher of the two penalties is the failure to file or delinquency penalty. This penalty is assessed at a rate of 5 percent per month to a maximum of 25 percent of the tax shown on the return. The failure to pay penalty is the less severe of the two penalties; it is assessed at a rate of ½ percent for each month the payment is late. This penalty can also run to a maximum of 25 percent of the tax owing. Upon filing, the more costly delinquency penalty stops running and only the late payment penalty and related interest will continue to accrue.
Not filing, or waiting and filing late is a mistake. The probability exists that the IRS will eventually catch up with your client and demand that he file. If a taxpayer refuses to file, the IRS may even prepare the return and settle any tax issues in IRS's favor. This can be a very costly situation. The IRS has the following two programs encourage compliance and assist taxpayers in meeting their tax liabilities.
One of these programs is the ability to pay taxes over time. This arrangement is called an Installment Agreement (IA). If the amount due is $25,000 or less, an automatic installment payment plan of up to five years can be established by either a phone call to the IRS or by filling Form 9465 (Installment Agreement Request). With an IA, the taxpayer can chose the amount and time during the month he wants to make his tax payment. However, you need to keep in mind that there are fees for establishing this type of agreement and the taxpayer is required to keep up with all subsequent filings and payments. The IRS may also require your client to pay a greater monthly installment before approving the IA. For tax bills higher than $25,000, an IA can still be entered into, but additional information will be required (Form 433-F, Collection Information Form) and a lien will, most likely, be filed against your client. Additional information can be found on the IRS Web site.
Another option available for delinquent taxpayers is the Offer in Compromise (OIC). The OIC is a program that allows the IRS to forgive all or part of a tax debt if the taxpayer does not have the ability to ever pay the debt. The taxpayer will be required to prove that there is doubt as to his ability to pay the tax or that the tax may be incorrect. Forms 656 (Offer in Compromise) and 433 (Collection Information Form) are required to be submitted, along with a filing fee. Additional information can be found on the IRS Web site.
In these turbulent economic times clients may be afraid or hesitate to do the right thing. But as their trusted advisors we can provide a valuable service in helping them come into compliance with their filing/payment obligations. Coming clean is always the best and least costly method of curing the situation. We are in a unique position to help by providing professional guidance and representation throughout the process.
About the author
Hal Margolit is a CPA with the Philadelphia-based CPA firm of Shechtman Marks Devor, PC