An IRS revenue officer has told you to be up-to-date with your federal tax filing and payments. So what does it mean to be current on your estimated tax payments from the IRS? How important is this to getting a tax ruling from the IRS? Read on for answers to these questions and other related concerns.
Making Estimated Tax Payments: What Does It Mean to Be Current?
You are trying to negotiate with the IRS to end last year’s tax problems, yet the current year is still ongoing. As the current year comes to an end, you incur a new liability for that year. By April 15 of the following year, the US tax authorities expect you to pay what you owe, regardless of whether or not you have paid taxes due from prior years, because they want you to avoid accumulating new tax debt. In order for the IRS to allow you to pay taxes from prior years, you must make sure you pay taxes for the current year.
Why you should follow the estimated tax rules
If you are not current with your tax payments, the IRS or local tax authorities will not consider any of your proposed payment plans (although there are some exceptions that apply). A question often asked is, “Why can’t these tax authorities transfer my current year’s tax debt to the monthly installments I pay to finally pay off my debt?”
This is one of the most common misconceptions about back taxes. The IRS doesn’t work like a credit card company that allows you to make a partial payment each month while adding new obligations to your balance. No, the federal tax system is unique. A new tax liability incurred will automatically void any prior agreements you 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 must be current if you want the Federal Tax Link Notice removed.)
The above principle also applies to an Offer In Compromise (OIC) accepted by the IRS. Once an OIC is accepted, the taxpayer cannot incur a new tax liability for the next five years or until the offer amount is paid in full. If you incur a new tax debt within that time period, the IRS will default on your offer in compromise and reinstate the full amount of your original liability with interest.
In addition, to negotiate installment agreements, you must also be current on estimated tax payments and federal tax deposits. Taxpayers are often unable to negotiate an installment agreement with the IRS because they fail to submit proper documentation and their estimated tax payments on collection information returns.
In general, the requirement of “being up to date” is extremely difficult for most people and we completely agree on this. For salaried (W-2) employees, the estimated tax burden may be easier to manage since only one deposit is required. But for companies with unpaid payroll taxes, it’s much more difficult. Unfortunately, whether simple or difficult to manage, the fact remains that you must be in compliance with taxes to get a ruling from the IRS.
How to avoid estimated tax penalties and ensure the best tax resolution
If you’re an employee, make sure enough tax is taken from your base pay so you can avoid paying estimated tax. If you are an employer, diligently follow the deposit scheme and submit 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 pay stubs that you can use to make your quarterly payments for the current year. Fill out the appropriate voucher, enclose your check, and mail it to the IRS each quarter to stay current.