If you owe taxes…

While the deadline to file your 2020 tax returns has been extended to May 17, 2021, this will be my final tax season post so I can move on to other interesting topics. This tax filing extension is certainly a benefit to all filers. Tax filers benefit because they have more time to get everything in order and make payments (if they owe taxes). Accountants also benefit from the additional time.

As I mentioned in a prior post, a tax refund is the difference between the taxes you withheld for that tax year versus your actual obligation in a given year. Every year we hope that we don’t wind up owing taxes, however it does happen, whether expected or unexpected.

If you owe taxes, it is always best to pay by the filing deadline to avoid interest and penalties. When you cannot make the payment, or the full payment, you have some options to address tax debt. I previously discussed how older tax debt can be eliminated in Chapter 7 bankruptcy and how back taxes can be repaid over a five-year Chapter 13 plan (typically with no additional interest or penalties!). Aside from bankruptcy there are options to address tax debt. You should consult your accountant to see if these options work for you.

Both the IRS and New York State Department of Taxation and Finance will accept payment plans. You will have to contact them to arrange a plan. You may enter into a short-term or long-term plan. While interest and penalties will continue to accrue until the balance is paid, this is certainly a better option than not making a payment at all as this will avoid a tax lien or tax levy. 

In addition to a payment plan, both the IRS and New York State allow for an offer in compromise. Here, they are accepted less than the total balance owed. In this program, you have to fill out an application (with a fee) and make a significant payment with the application towards your tax balance. Within the application, you can make an offer of either a lump-sum or payment plan. The taxing authority wants to know that they are collecting the most they can expect over a reasonable period of time. The application is lengthy and a recent article I read noted that the IRS denies most applications. However, like anything else, you will always have a greater likelihood of success with a strong and detailed application.

One final concept is one known as the innocent spouse. When spouses file a joint return and owe taxes, the liability is owed jointly but also individually on each spouse. The innocent spouse can seek to have his or her obligation lifted if he or she can demonstrate the following:

  1. the return understated income or took improper deductions; and
  2. at the time you signed the return, the innocent spouse did not know, or have any reason to know, that income or deductions were incorrect

Innocent spouse relief comes into play in two common instances. First, to avoid liability created by a former spouse when that former spouse created this liability and you had no knowledge of the former spouse’s finances to even know there was an error. Second, when spouses owe taxes due to the action of one spouse and are looking to repay the taxes in a bankruptcy reorganization (Chapter 13) to save on interest and penalties, the innocent spouse can obtain relief from the tax obligation first so that both spouses do not need bankruptcy relief.

As a reminder, all tax questions and issues should always be addressed by an accountant. I am not an accountant, rather I provide information about legal issues. Always consult with an attorney to discuss your personal legal issues. If you find yourself owing significant taxes, an experienced debt attorney can review all options and help you resolve them in the best possible manner.

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Zimmelman Law PLLC

With over ten years of experience, Matthew D. Zimmelman, Esq. has helped thousands become debt-free and saved countless New Yorkers from losing their homes in foreclosure. Whether you are an individual or a small business, looking to file bankruptcy or looking to eliminate your debt without filing bankruptcy, we are here to help you get a fresh start.
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