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IRS Compliance Requirement
Under IRS collection processes, the term “compliance” is the requirement that taxpayers must follow the IRS rules and procedures for reporting income, filing returns, and being current on tax obligations such as federal tax deposits or estimated tax payments. The definition of compliance seems straightforward, but becomes more complicated with the unique facts of each taxpayer.
Compliance for Filing Missing Tax Returns
A common occurrence is when the IRS requests that the taxpayer be compliant on filing his or her tax returns before the IRS will enter into any kind of resolution with the taxpayer. In essence, the IRS is requesting that the taxpayer weigh his or her two options:
Option 1: File the missing return.
If the taxpayer were to file his or her missing returns, the taxpayer would be disclosing all his or her income information, what he is claiming as deductions and adjustments, who he is claiming as his or her dependants, and possibly subjecting himself to additional back tax liabilities plus interest as well as the penalties for filing late. If the return shows a refund, the taxpayer will likely not receive it if the taxpayer has an outstanding back tax liability for other tax years. The upside is that the taxpayer is now “compliant” according to IRS regulations, and can now move forward with seeking a tax resolution such as establishing an Installment Agreement (IA), being placed on Currently Not Collectible (CNC) status, or settling his or her back tax obligation through an Offer in Compromise (OIC). Additionally, by being compliant, the taxpayer is able to address collection activities, such as bank levies or wage garnishments.
Option 2: Do not file the missing return.
If the taxpayer decides not to file the missing return, then he will not report a tax liability. However, the taxpayer risks the IRS filing a Substitute for Return (SFR) on his or her behalf. There is a chance the IRS will file a SFR on the taxpayer’s behalf, especially in a situation where the IRS has income information about the taxpayer from a third party (e.g. the taxpayer’s employer). In almost all cases, the SFR does not favor the taxpayer because the IRS prepares the return without factoring in personal exemptions, deductions, and credits such as student loan interest payments, mortgage interest payments, earned income credit, etc. While these items would have lowered the tax liability had the taxpayer filed his or her own tax return, the taxpayer does not get the benefit of these items by not filing a return. The taxpayer also risks collection action the longer he decides not to file his or her tax return.
When does a Taxpayer have a Filing Requirement?
Generally, under the IRM 5.1.11.1.3(2), an IRS employee conducting a compliance check is charged with the duty to confirm and document that all tax returns were filed for the preceding 6-year period. In most cases, a taxpayer will be asked to file a tax return if he did not file a return from any years from 2003 until 2008. Under the IRM 1.2.1.5.19, an investigation into compliance will go back no more than six years. Anything more or less than six years requires managerial approval.
However, a taxpayer may not have a filing requirement if he did not make enough income for a particular tax year. Under Publication 501, for the tax year 2008, the IRS outlines exactly the criteria for a filing requirement. For instance, a married couple both under the age of 65 would have no filing requirement if jointly they earned less than $17,900.00. The income requirement would change for an individual who is not married and files a single return or for a person who claims that he or she is head of a household.
Compliance for Proper Withholding
A taxpayer who receives a W-2 statement from his or her employer may owe taxes to the IRS if not enough taxes are withheld from his or her paycheck during the course of the tax year. The balance will persist and become collectible as soon as that year’s tax filing deadline passes if the taxpayer has not paid the taxes owed.
The W-4 is the form each employee fills out when first starting a new job. The Form W-4 will ask for the taxpayer’s social security number and the number of withholdings he is electing for the payroll department to deduct from his or her paycheck for taxes. If the taxpayer elects to have one exemption, he is instructing his or her payroll administrator to withhold a lot of taxes to pay to the IRS per paycheck. If the taxpayer elects to have 10 exemptions, he is instructing his or her payroll administrator to withhold very little for taxes per paycheck to pay to the IRS.
The IRS will allow a taxpayer to claim whatever amount of exemptions on his or her Form W-4 initially. However, a problem will arise if the taxpayer does not have enough taxes withheld during the course of the year, because the number of exemptions on his or her tax return is substantially lower that then number of exemptions he claimed on his or her Form W-4.
When this occurs, the IRS will issue a notice called a “lock-in” letter to the taxpayer’s employer that specifies the maximum number of withholding exemptions that the employee is permitted to claim for payroll purposes. The employer will be provided a letter to forward to the employee. The letter will explain that the employee has a certain amount of time, before the lock-in rate becomes effective, to submit to the IRS for approval a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease the amount of federal income tax withheld.
The employer must withhold taxes in accordance with the lock-in letter as of the date specified in the lock-in letter, unless otherwise notified by the IRS. The employer is required to take this action no sooner than 45 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, the taxpayer cannot decrease the increase the number of exemptions unless approved by the IRS.
If the employer fails to comply with the IRS lock-in letter, the employer could become liable to pay the additional taxes that should have been withheld.
Compliance for Estimated Tax Payments
The application of estimated tax payments applies mostly to individuals who are self-employed and who do not pay taxes through withholding. It also applies to individuals who do not pay enough through withholding and to individuals who receive dividends, interest, capital gains, rents, and royalties.
The premise of estimated tax payments is simple. If a taxpayer makes income during the course of the tax year, the taxpayer is required to pay the taxes from the income made during each quarter by the due date designated for each quarter. The amount a taxpayer is required to pay in estimated tax payments is outlined in the Estimated Tax Worksheet.
When reviewing for compliance for estimated tax payments, an IRS employee may confirm whether or not quarterly estimated tax payments have been made for each quarter. If estimated tax payments have not been made as required, a taxpayer’s chance for resolving his or her back tax liability could be negatively affected.
Source: RoniDeutch.com
