Once an individual or business falls behind with paying their taxes, a time-bomb clock starts ticking.
If you are unable to full pay your tax liability and you wish to avoid nasty consequences, you must become eligible for some form of voluntary tax resolution, then implement that solution before the time-bomb explodes and the IRS or state taxing authority starts dropping the hammer (think levied bank accounts, garnished wages, seizure of assets, etc.).
It is almost always far better to resolve a back tax debt voluntarily by way of an affordable Installment Agreement, an Offer in Compromise (tax settlement) or Currently Not Collectible Status. But first, you’ve got to become eligible or else no deal. In this article I will explain what anyone in tax collections absolutely must know in order to become eligible for voluntary tax resolution—the first step on the road to recovery.
Since it would take me all day and then some to describe eligibility requirements for the voluntary resolution of state tax debts (there are 50 states after all), I’m going to focus on IRS eligibility requirements. State eligibility requirements are almost universally very similar, if not identical, to IRS requirements. So, read on if you’re concerned about a state tax debt.
Before any form of voluntary resolution can be secured, it needs to be understood that the IRS will not approve voluntary resolution short of full payment unless a few basic, but very important, requirements are first satisfied. As will be discussed, these requirements revolve around complete and current tax compliance.-
IRS TAX Filing Compliance
The taxpayer, whether it is a business or an individual, needs to be in complete filing compliance. This specifically means that every single delinquent tax return that has not been filed, but is past due, needs to be filed. There are two general exceptions to this requirement. It is a general IRS policy to not require personal 1040 tax returns that are over six years old to be filed. Additionally, you are not required to file a return if the IRS has already estimated the delinquent return for you by filing a substitute for return. However, it is almost never beneficial to have the IRS file a substitute for return as they almost always overestimate the tax liability.
The IRS requires filing compliance because any form of resolution (e.g. Installment Agreement, Currently Not Collectible, Offer in Compromise) is required to include every outstanding period of liability and there is no way of confirming that all periods of liability have been addressed and included in the resolution if an outstanding return, that is past due, has yet to be filed. Moreover, and to put it bluntly, if you have delinquent returns and request voluntary resolution, the IRS is going to say no.
I personally recommend that returns either be remitted to the IRS electronically or via USPS return receipt certified mail. I recommend these forms of delivery because all too often the IRS will claim that a return that has been remitted was never received and ultimately the burden is on the taxpayer to prove that the return has been filed.
TAXPAYER Deposit Compliance
The next requirement is that the taxpayer, again whether a business or an individual, is in current deposit compliance with all required payments. Specifically, this means that any and all current tax deposits that are required are made on time and in full. This is a requirement because any form of voluntary resolution covers only the existing back tax liability. The accrual of a new liability will cause the voluntary resolution agreement to default. Also, as is the case with unfiled returns, the IRS will say “no” if you request voluntary resolution and you are out of deposit compliance.
I should mention that, should you default, you will likely wind up in worse shape than you’re already in. When a taxpayer defaults due to a new tax liability, they will be considered a “repeat offender,” and the IRS will be less willing to enter into a new agreement and more likely to proceed with enforced collections. So, don’t default! In order to secure terms that you can to which you can abide, it is highly recommended that you have an experienced tax resolution professional assist you, particularly if you are dealing with a large tax debt.
Deposit Compliance for Businesses TAXPAYERS
Any business who issues payroll to its employees needs to ensure that all 941 employment tax deposits are made in full and on time. The required deposit schedule will vary from business to business as it is dependent on the gross amount of payroll that is issued each quarter. The deposit schedule will be either quarterly (due with the return on the last day of the month following the end of the quarter), monthly (due on the 15th of each month for the preceding month), semiweekly (due within a few days of each and every payroll), or they will be due the very next day after payroll if the taxes accumulated are $100,000 or more on any day during the deposit period.
Note that I am going to exclude further discussion of the Next-Day Deposit Rule ($100k or more in payroll taxes accumulated on any day during the deposit period), as this applies only to large businesses who really ought to have at least one CPA closely involved with their financial affairs.
The IRS determines the deposit schedule for each calendar year by using a four-quarter lookback period. The lookback period for a given calendar year is the 3rd and 4th quarters of 2 years prior to the given year plus the 1st and 2nd quarters of the prior year (e.g. the lookback period for 2020 is 3rd and 4th quarters of 2018 plus 1st and 2nd quarters of 2019).
If payroll of less than $50,000 was reported during the lookback period, the business is considered a monthly tax depositor. If payroll of more than $50,000 was reported during the lookback period, the business is a semiweekly tax depositor. If your business is on a monthly or semiweekly deposit schedule, you should be enrolled with Electronic Federal Tax Payments System (EFTPS) so the required deposits can be made online.
The only situation where it is acceptable to mail a 941 employment tax deposit with a physical check with the quarterly 941 employment tax return is if the business is a quarterly tax depositor. A quarterly tax depositor is the exception to the lookback period as a business can only be a quarterly tax depositor if its 941 employment tax liability for the entire quarter is under $2,500.
If, after reviewing the four-quarter lookback period, it is determined that the business is a monthly 941 employment tax depositor, the monthly federal tax deposit for the current month is due on the 15th of the next month (i.e. January’s deposit is due on February 15th). Due to the fact that it can take a day for a deposit remitted via EFTPS to settle, it is highly advisable to make the deposit by no later than the 14th of the month so the payment actually settles by the due date of the 15th.
It should be noted that even if a business is a monthly tax depositor, more frequent deposits can be made with no issue. In fact, I often encourage my clients to do this in order to minimize the financial burden of having to remit a single larger payment each month.
If it is determined that the business is a semiweekly depositor, the due date of the required deposits is based on the day that payroll is issued. If payroll is issued on a Wednesday, Thursday, and/or Friday, the required federal tax deposit is due by the following Wednesday. If payroll is issued on a Saturday, Sunday, Monday, and/or Tuesday, the required federal tax deposit is due by the following Friday. As previously mentioned, it is advisable to make the federal tax deposit at least a day before the actual due date in order to ensure that the payment settles by the due date.
While most businesses are required to make monthly or semiweekly 941 employment tax deposits, a business may also be required to make quarterly deposits toward its future 940 unemployment tax return as well. Quarterly 940 unemployment tax deposits are only required once the cumulative quarterly unemployment tax obligation exceeds $500.
For example, if the 940 unemployment tax for the first quarter is $250, no deposit is necessary for that quarter. However, that tax then carries forward to the next quarter. Thus, if the tax liability for the second quarter is $300, the combined first and second quarter 940 unemployment tax liability will then exceed $500 and so a federal tax deposit requirement is then triggered for that quarter. Once triggered, the 940 unemployment tax deposit is due by the last day of the month for the month following the end of the quarter in which it is required.
Given the example above, if a 940 unemployment tax deposit is triggered in the second quarter (i.e. April, May, and June), the deposit will then be due by the last day of July since the second quarter ends in June. If the cumulative tax liability never exceeds $500, then it is acceptable to pay the 940 unemployment tax liability with the return at the end of January of the following year as that is when the actual annual return is due.
Individual TAXPAYER Deposit Compliance
Since an individual does not have employees like a business, the primary federal tax deposits that are applicable to an individual are quarterly estimated 1040 personal income tax deposits. However, not every individual taxpayer is required to make quarterly estimated 1040 personal income tax deposits. For most wage earners, correct withholdings will alleviate this need. Quarterly estimate 1040 deposits are more often required when an individual has some kind of income from which taxes are not being withheld.
The quickest and simplest way to determine if you are required to make a quarterly estimated 1040 income tax deposit is to look at your prior year’s return. If the income tax liability was over $1,000 (after subtracting federal tax withholding and credits) then you are required to make quarterly estimated 1040 income tax deposits toward the next year’s 1040 income tax return.
The quickest and simplest way to determine the amount of the quarterly estimated 1040 personal income tax deposit is to take the tax liability from the prior year’s return and divide it by four. Any required quarterly estimated 1040 personal income tax deposits are due on April 15th, June 15th, September 15th, and January 15th (January 15th of the following year). However, you are not required to make the estimated tax deposit that is due on January 15th if you file the 1040 personal income tax return by February 1st and simultaneously pay the entire balance due with the return.
One method of reducing the probability of having an outstanding 1040 personal income tax liability and, thus, the requirement of having to make quarterly estimated deposits is to simply increase your federal income tax withholding from your W-2 wages. This tactic more or less accomplishes the same thing as making quarterly estimated payments because it results in having additional funds taken out of each paycheck in order to have those funds then credited to your future return. Increasing your federal income tax withholdings can be done by updating a W-4 withholding form and providing it to your employer for processing.
Preventing Enforcement While Becoming Eligible
For some taxpayers, whether business or individual, it can take some time to get into compliance and, thus, become eligible for voluntary tax resolution. There are many ways to minimize or eliminate the chances of enforcement while one gets into compliance, and those are well beyond the scope of this article.
If you owe and need time to get into compliance, contact a well-qualified tax resolution professional right away. A good one can slow the time-bomb clock down, help you get into compliance more quickly, protect you from enforcement while you are becoming eligible for voluntary resolution, help you determine the best resolution strategy for your specific needs and circumstances, and give you the best chance of securing a sweet deal—one that you won’t wind up defaulting.