7 things to know when your client can’t pay their taxes
It’s part of our professional responsibilities to help our clients pay the least amount of taxes under the law, but when our clients have great years with their business or receive an unexpected windfall, the size of their tax bill can come as a shock.
Big tax bills need not be a source of fear. As Greg Crabtree says in his book, Simple Numbers, Straight Talk, Big Profits!, “The higher your tax bill, the better your business is doing. This is your number one key performance indicator.” However, scoring well on this KPI isn’t much comfort if your client doesn’t have the cash set aside to pay that tax bill.
Fortunately, there are options out there. Here are seven things to know when your clients are profit-rich and cash-short:
- Can’t pay? File that return regardless. Above all, even if your client doesn’t have the funds to pay their taxes in full, make sure they file their tax return. There are separate penalties for failing to file and failing to pay. The failure to file penalty is higher: 5 percent of the outstanding balance due for each month that the tax return is late, up to a maximum of 25 percent of the total taxes due. The failure to pay penalty, in contrast, is only 0.5 percent of the balance due. Filing a return – even without a payment – will at least remove the failure to file penalty.
- Pay as much as possible with the return. Even paying a small amount with the return can help reduce penalties and interest down the road. Plus, it demonstrates a good faith effort, which can go a long way in keeping the IRS off your client’s back.
- Ask for extra time to pay. The IRS may be willing to give your client up to 120 additional days to pay. You can request this by calling the IRS at 1-800-829-1040 or by applying online. Late payment interest and penalties will continue to accrue, but this might give your client just enough breathing room to pull together enough cash.
- Pay by credit card. Depending on your client’s situation, this might be a reasonable choice, especially if it’s just a timing issue. However, additional fees apply because this is handled by third-party credit card processors, not directly through the IRS.
- Consider a home equity loan. It may seem drastic to take out a home equity loan to pay off a tax debt, but this could be a good option, depending on your client’s situation. However, your client should be aware that under the 2017 tax reform, interest on a home equity loan used to pay off a tax bill is no longer deductible.
- Take longer to pay with an installment agreement. With an installment agreement, your client can take up to 72 months – or longer, under certain circumstances – to pay off a tax bill. With a Power of Attorney, you can apply online or call the IRS at 800-829-1040, or you can help your client fill out Form 9465, Installment Agreement Request. There may be additional fees, depending on the length of the agreement and the method of payment, and interest will continue to accrue.
- Pay less with an Offer in Compromise (OIC). This is a last resort option if your clients really don’t have any other resources. To qualify, you’ll need to help your clients fill out all the forms in Form 656 Booklet, Offer in Compromise. Your client will need to demonstrate that they don’t have any other options to pay the IRS: no equity in their home, no credit cards with available credit, no valuable assets to sell, no bank accounts or investments, and limited income. Your clients must also be current with tax filings and tax payments, and can’t be in bankruptcy proceedings.
Don’t ignore tax debt
Ignoring the IRS will only make it worse for your clients. In addition to stacking on interest and penalties, delinquent taxpayers may face jail time, garnishment of Social Security benefits or wages, and may have bank accounts or other assets seized. Taxpayers may also have their passports revoked.
The best way to help your clients stay out of trouble with the IRS is to take an active role as an advisor. Estimating their tax liability throughout the year and helping them come up with a plan to set aside cash to pay their taxes can help turn that tax bill into what Crabtree calls a powerful marker of success instead of a source of fear!