Editor’s Note: Guest blogger Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers across the country. He has a resource section with how-to articles specifically for the self-employed at his website, www.cpaforfreelancers.com.
Every year in the weeks around tax time, I hear from freelancers who can't file their tax returns on time or who have filed but can’t pay the IRS the money they owe. Given the state of the economy over the past several years, it’s not surprising that I meet with many freelancers who are several years’ delinquent on their tax returns or their tax payments or both.
These people are not in a good situation, but there is good news for them. It’s called the IRS Fresh Start program.
The goal of Fresh Start is to help individuals and small businesses meet their tax obligations, pay back taxes, and avoid tax liens. Liens allow the government to establish a legal interest in your property and assets if you don’t pay outstanding tax debt. Once a lien is put on your property, the IRS can take away that property and liquidate it to pay your debt.
The Fresh Start program uses several tools to help individuals who owe back taxes avoid liens and levies. People who take advantage of the program must get all their back tax returns filed and start making payments on time before they will be accepted.
Here are the details on two that are especially applicable to many of my freelance clients:
1) The IRS's Offers in Compromise program allows certain individuals to settle their debt for less than what they fully owe. Individuals whom the IRS determines are financially unlikely to be able to pay the full amount of their tax liability in a timely manner are more likely to get compromise agreements.
If the IRS believes you can pay the full amount you owe – either as a lump sum or on a payment plan – it usually will not compromise with you. This determination is made by weighing your income and assets, among other factors. You can use this tool to determine if you’re eligible for an offer in compromise.
Every year, I help freelancers complete Form 656-B and submit it to the IRS. This packet of documents includes their compromise offer to the tax authorities, along with financial statements documenting their inability to pay in full, a $150 non-refundable fee and their first compromise payment.
If you are interested in making an offer in compromise and think you are eligible, it’s best to do it as soon as possible. The IRS has up to two years to consider an offer, and penalties and interest continue to accrue on the unpaid tax liability during that time. Offers that are rejected can be resubmitted or appealed.
2) Streamlined Installment Agreements are available for individuals who owe up to $50,000 and are current with their tax filings. The agreements allow them to pay their debt through monthly direct debit payments for up to six years.
You can apply online for an installment agreement. If you have had a tax lien placed on your property, getting into a direct debit installment plan may qualify you to have that lien withdrawn. If you default on the installment agreement, however, the IRS may file a new Notice of Federal Tax Lien and resume collection actions.
If your annual income is up to $100,000 and you owe less than $50,000, an installment agreement is a less-painful way to get right with the IRS. If you are in the same situation with your state taxes, as many freelancers are, look into whether your state has similar programs. New York State, for instance, offers installment payment plans and offers in compromise to delinquent taxpayers.
It can be intimidating to deal with the IRS directly, and you might need help getting your application filled out and your delinquent returns cleaned up and filed. Get professional help with the Fresh Start process and, at the same time, ask your CPA to get you onto a disciplined schedule of saving money throughout the year to make quarterly payments and do your regular tax filings. Once you go through this effort, you won’t want to get into this situation again in the future.