I want to take some time and go over the importance of "being current." Maybe you heard an IRS revenue officer or other IRS or state collections employee say to you "you need to be current." Well, what does it mean to be current with your IRS estimated tax payments? And why is it critically important?
What does being current with your estimated tax payments mean?
While you are trying to resolve past years' IRS tax problems and debts, the current year is going by, right? As it progresses and you are earning income, you are incurring a tax liability for the current year. On April 15th of next year your Federal, State and sometimes local taxing authorities will have their hands out, expecting that you pay what is due (or rather you have already paid, by December 31st, all the tax that was due).
They don't want you owing them money again (and you probably don't either). The only way that you can be sure of not having another tax debt when it is time to file this year's taxes next year, is by making payments during this year.
Why is being current with your estimated tax payments so important?
Neither the IRS nor the state and local taxing authorities will consider any plan to resolve your matter unless you are current (we have seen a few very, very limited exceptions apply). If you think about it, why would anyone want to try to settle a past account with a debtor if the debtor continues to amass more debt? "Well, why not"? You may ask. "They can just roll this year's new tax debt into the installment agreement I pay, and eventually I'll pay them back."
The IRS doesn't work that way. The IRS does not think about themselves as a credit card company where there is an amount you pay each month, and they just keep tacking new tax liabilities on your balance. No, the IRS works completely different. When you incur a new tax liability, you default any agreement you had with them. And worse, the IRS then considers you a bad, bad taxpayer — someone who they are going to give the hardest time to.
This includes an accepted and paid IRS Offer in Compromise. Once an Offer in Compromise is accepted, you have to make sure you do not incur another IRS tax debt for the next 5 years, or they will default your entire offer in compromise and everything you just settled will come back. It also includes installment agreements for which there were agreements not to file a tax lien.
Too many times, people try to negotiate a deal with the IRS, but fail to properly document and prove their estimated tax payments in their Collection Information Statements.
"But it is so hard becoming current with estimated tax payments!"
We agree. A wage-earning (W-2) employee has an easier burden. But for partners, business with unpaid payroll taxes, it is a lot harder. Moreover, if a good part of the current year has gone by and you haven’t made payments, then you have a big nut to crack. Hard or not, the tax liabilities have to be paid.
Tip 1: Most of the time, two-quarters of estimated payments are all that is necessary to negotiate.
Tip 2: The important and overlooked thing is that the agreement must take into account that both parties, you and the IRS, know that there will be a new liability coming due once this current tax year is filed and have an agreement that contemplates this known, future liability.
Safe ways of being current with your estimated payments
If you are an employee, be sure your withholdings are in line with what your tax payments will be. Would you believe that the IRS has actually indicted people for not withholding enough from their pay? Yes, it is very rare but is can happen if you say withhold "99" when your actual should be around a 3 or 4 allowance.
If you are self-employed, your tax return will create vouchers for paying the past year and four vouchers for paying each quarterly estimated tax payment for the current year. As long as your income is not greater than last year’s, completing the voucher, writing the check and mailing it in will keep you current.
If you are an employer, follow the correct deposit schedule and file your form 941 (and 940).
What to pay first?
In a perfect world, no one would ever run short of cash and there would be enough to pay everyone. But that isn't reality, is it? So at some point, you need to prioritize. Should you pay an old tax debt or your current payments? Should you pay other debt or your estimated tax payments? Here is the most important thing I want you to get from this article: When push comes to shove, pay your current estimated tax payments first! Old tax debts can all be negotiated. Future tax problems cannot be.
We feel so strongly about this, we won't let anyone retain us to negotiate their back personal, business or payroll tax problems unless they make a commitment to become and stay current. We know that if you can't get current with your estimated tax payments, there will never be any complete resolution to a tax debt. We always refuse to take anyone's money if we do not think we can help them. If you need assistance, contact us and we'll let you know your best course of resolution.
Click below to read about more options for settling back tax debt.
