IRS Will Apply Your Voluntary “Overpayments” to Other Liabilities. In Berkowitz v. Comm’r,[i] the Tax Court upheld the IRS’s decision to apply the pro se taxpayers overpayments to outstanding Trust Fund Recovery Penalties liabilities, instead of refunding the overpayments to them. The Tax Court noted that when a taxpayer has made an overpayment of tax, the Commissioner has broad discretion to credit that overpayment to another liability — a discretion given to the IRS by IRC Section 6402(a). IRC 6402(a) permits the IRS, within the applicable period of limitations, to credit the amount of overpayments, including any interest allowed thereon, against tax liabilities of that person. Moreover, IRC Section 6402(d) even further permits the IRS to reduce the amount of overpayment by debts owed to other federal agencies.
Berkowitz provides a helpful reminder during the tax filing season of how overpayments may impact, or be impacted by, other tax years and liabilities. Below are a few examples of when IRC Section 6402 can result in surprises to taxpayers and their advisors.
Designating Overpayment to Current Tax Year. Often, taxpayers request on their tax returns that overpayments from prior periods apply as “estimated payments” to their current tax years. If such overpayments are taken by the IRS to apply against other periods, this “payment” is no longer present and it may subject the taxpayer to estimated payment penalties, or just result in an unexpected surprise and render them unable to make the tax payment required with the return. Tax practitioners should ask about any outstanding liabilities when preparing timely filed tax returns in order to avoid surprises.
Ability to Utilize Collection Due Process Appeal Rights may be Compromised. In other instances, a tax practitioner may be planning to dispute the underlying liability of an assessable penalty or assessed interest in a timely filed collection due process proceeding. Unlike tax deficiencies that taxpayers can dispute in the Tax Court before payment, taxpayers subjected to certain assessable penalties, such as the failure to file certain international informational returns, may not have a pre-assessment judicial forum to dispute the liabilities. The IRS’s application of IRC Section 6402 may act to take away the taxpayer’s ability to utilize their CDP appeal rights. For example, consider a taxpayer who plans to dispute a $10,000 penalty for the failure to file a Form 5471 in a timely filed CDP proceeding before the IRS issues a levy. If the IRS takes that taxpayer’s overpayment from another tax year to apply against the $10,000 penalty, the administrative collection proceedings become moot (the IRS already collected the entire $10,000 penalty), and taxpayer will instead need to seek a refund of the penalty.
In light of the potential impact of the IRS applying overpayments, practitioners need to monitor estimated payments made during the year and think about what may happen if the IRS takes them after the return is filed.
Should You File Your Tax Return Even if You Can’t Pay Taxes On Time? When it comes to filing your tax return, the IRS can assess a penalty if you fail to file, fail to pay or both. If you do not file your tax return by the deadline, you might face a failure-to-file penalty of 5 percent of the unpaid taxes for each month or part of a month that your return remains unfiled – the failure-to-file penalty will not exceed 25 percent of your unpaid taxes.
If you do not pay by the due date, you might face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid – the failure-to-pay penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty (such that the aggregate penalty is 5 percent per month or part of such month).
If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date. Also, you will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of “reasonable cause and not because of willful neglect.”
File on time and pay as much as you can. You can pay online, by phone, or by check or money order. Visit IRS.gov for electronic payment options.
- Get a loan or use a credit card to pay your tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. For credit card options, see IRS.gov.
- Use the Online Payment Agreement tool. You don’t need to wait for IRS to send you a bill before you ask for a payment plan. The best way is to use the Online Payment Agreement tool on IRS.gov. You qualify if you owe $50,000 or less in combined tax, penalties and interest, and filed all required returns. You may also qualify for a short term agreement if your balance is under $100,000.You can also file Form 9465, Installment Agreement Request, with your tax return. You can even set up a direct debit agreement. With this type of payment plan, you won’t have to write a check and mail it on time each month.
- Don’t ignore a tax bill. If you get a bill, don’t ignore it. The IRS may take collection action if you ignore the bill. Contact the IRS right away to talk about your options. If you are suffering financial hardship, the IRS will work with you.
- File to reconcile Advance Payments of the Premium Tax Credit. You must file a tax return and submit Form 8962 to reconcile advance payments of the premium tax credit with the actual premium tax credit to which you are entitled. You will need Form 1095-A from the Marketplace to complete Form 8962. Failure to reconcile your advance payments of the premium tax credit on Form 8962 may make you ineligible to receive future advance payments.
Also check out IRS Videos about owing taxes.
CORY STIGILE – For more information please contact Cory Stigile – email@example.com Mr. Stigile is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes Federal and state civil and criminal tax controversy matters and tax litigation, including sensitive tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. His practice also includes complex civil tax examinations. Additional information is available at www.taxlitigator.com
[i] Berkowitz v. Comm’r, T.C. Summary Op. 2016-16 (April 13, 2016)