By Anthony E Parent
You have been told to be current on your filing and payments of federal taxes by an IRS revenue officer. So what does it mean to be current on IRS estimated tax payments? How important is this to get any tax resolution from the IRS? Continue reading to get the answers to these questions and your other related concerns.
Making estimated tax payments: What does being current mean?
You are trying to negotiate with the IRS to end your past year’s tax issues however, the current year is still running. As the current year comes to an end you incur a new liability for that year. By April 15th of the following year, the US tax authorities expect you to pay what is due regardless of whether you have paid your previous years’ tax dues or not as they want you to avoid accumulating new tax debts. In order for the IRS to allow you to pay for your prior years’ taxes, you have to ensure that your current year taxes are paid.
Why you should follow estimated tax rules
If you are not current on your tax payments none of your proposed payment plans are going to be taken into consideration by the IRS or the local taxing authorities (although there are a few exceptions that apply). A question often asked is, “Why can’t these tax authorities roll over my current year’s tax debt into the monthly installments that I pay to eventually settle my debt.”
This is one of the most common misconceptions of back taxes. The IRS doesn’t operate like a credit card company allowing you to make a partial payment each month while adding new liabilities onto your balance. No, the federal tax system is unique. A new tax liability incurred will automatically default any previous agreements you’ve had with the IRS. The IRS will now consider you a “bad” taxpayer who repeatedly falls behind on payments, making your situation worse. (Side note: You have to be current if you want the Notice of Federal Tax Lien withdrawn).
The above principle also applies to an accepted IRS Offer in Compromise (OIC). Once an OIC is accepted, the taxpayer cannot incur new tax debt for the next five years or until the offer amount is paid in full. If you incur new tax debt within that time period, the IRS will default your offer in compromise and reinstate the entire amount of your original liability with interest.
Additionally, in order to negotiate installment agreements, you also have to be current with estimated tax payments and federal tax deposits. Frequently, taxpayers fail to negotiate a payment deal with the IRS because they do not submit proper documentation and their estimated tax payments in Collection Information Statements.
Overall, the requirement of “being current” is extremely difficult for the majority of people and we completely agree on this. For wage earning employees (W-2), the estimated tax burden may be easier to manage since there is only one deposit that is required. But for businesses with unpaid payroll taxes, it is a lot harder. Unfortunately, whether it is simple or difficult to manage, the fact of the matter is you have to be in tax compliance in order to get any resolution from the IRS.
How to avoid estimated tax penalties and secure the best tax resolution
If you are an employee, ensure that enough taxes are being taken from your base wages so that you can avoid paying estimated taxes. If you are an employer, follow the deposit schedule diligently and file Form 941 quarterly and Form 940 annually. If you are self-employed, calculate and make estimated tax payments using Form 1040-ES. This form contains four payment vouchers which you can use to make your current year quarterly payments. Fill in the appropriate voucher, enclose your check, and mail it to the IRS every quarter in order to stay current.
Which should you pay first, your old tax debts or current year payments? Should you pay other debt or estimated taxes? The most important point you should learn from this article is that when you are in a crunch, pay off your current year’s estimated payments first! Back tax payments can be negotiated with the IRS but future tax problems cannot be.
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