On March 11, 2014, I was online at CNN’s homepage and came across a link to an article called “Can’t pay Your Taxes? Don’t Panic: Here’s What You Need to Know.” I assume that the article was targeting income tax filers in contemplation of the current filing season, and it was correct enough as a simple explanation. But, as often happens when a complex subject is simplified, the overall product can be misleading. This is the case with the mentioned article. There were 5 general points: (1) file by the deadline or (2) seek an extension before the deadline; (3) seek an installment agreement if you cannot pay in full, and don’t worry about your credit if do get an agreement because (4) IRS doesn’t report to credit agencies. Finally, (5) figure out why it happened.
(1), (2) and (3) are usually correct, and certainly there are monetary consequences to filing late without an extension, and potentially more serious consequences to not filing at all. And equally true, if you need more time to prepare a return the reason to take an extension is that there is a 5% monthly late filing penalty, but a only 1/2% monthly late payment penalty, so that late paying penalties are usually minimized by filing on time (or taking an extension) even if you cannot pay on time. But filing by the due date or on extension will start collection activities rolling, so if you cannot pay the tax you owe you have to deal with IRS collection procedure. And this is where the problem begins.
As the article also suggests, you can (usually, we would say) get an installment agreement. But this is where the oversimplification tells only part of the story, because the comment in (4) that “IRS does not report to credit agencies” is misleading. It is misleading because in a great number of cases where there is a substantial outstanding tax bill that cannot be paid within a short period of time the IRS files a Notice of Federal Tax Lien (NFTL), and the NFTL is picked up by credit agencies, just like a judgment. So, if you cannot pay on time, but need to avoid a NFTL, you have to know the IRS lien filing standards for outstanding balaces, because the lien may affect your credit. Moreover, a NFTL attaches to all property, real and personal, in which a taxpayer has an interest. So if you file, cannot pay, and IRS files a NFTL you may be unable to move a piece of property without taking the tax debt into account. This possibility means you have to know the IRS lien priority law, as well as in what cases the IRS will work with you to discharge a lien on property that you may want to sell or refinance.
When you put all of this together you have a more complex picture for at least some people that the brief article allows. If you expect a large income tax bill that you think you cannot pay in full you may want to explore your options for payment before you file, especially if you have property which you cannot afford to have encumbered by a NFTL. Perhaps almost as important, if not more so, than the article’s number (5) (why the big bill happened) is my own suggested (6) – ok, it happened, now what do we do about it? If you would like to discuss collection planning options, either federal or Washington State, please contact our office.