When a taxpayer agrees to pay the IRS through a monthly Installment Agreement, the terms of the agreement require that the taxpayer (1) timely file all required federal tax returns and (2) timely pay all federal tax obligations for the entire duration of the Installment Agreement. This is known as being “in compliance.” If a taxpayer is not in compliance with all required filing and payment obligations, the IRS can (and will) terminate the Installment Agreement.
This sounds simple, but many taxpayers do not understand that extending the filing deadline of their income tax returns (personal or business) can ultimately lead to a default of the terms of their Installment Agreement. This is because extending the filing deadline of an income tax return does not extend the payment deadline.
The filing and payment deadline for an individual income tax return is April 15 each year. A taxpayer can properly extend the filing deadline to October 15 of that year, but the payment deadline is not extended. That means the entire tax due needs to be paid on April 15, even if the tax return is not filed. That requires the taxpayer to know what his or her income tax liability is on April 15 so any balance due can be full paid. This basically requires the taxpayer to know what the completed return will be as of April 15, to ensure that no tax will be due when the return is timely filed within the extended deadline of October 15.
For example, Tom is currently paying the IRS in an Installment Agreement. In 2016, he worked as an employee for half the year (earning wages) and for the other half of the year he worked as an independent contractor (having been issued Forms 1099). For various reasons, Tom and his return preparer could not complete his 2016 Individual Income Tax return for filing by April 18, 2017 (the filing deadline that year). Tom timely filed an extension to file his return in October 2017.
Tom knew he had withholding paid in to the IRS that year from his wages, but he never made any estimated tax payments in relation to the Forms 1099 he was issued as an independent contractor.[1] When Tom filed his 2016 return on October 15, 2017, he had a balance due of $10,000 on his return, because he had not paid in enough taxes during the year. Thus, this was a default, and the IRS terminated his Installment Agreement.
Although taxpayers in Installment Agreements can extend the filing deadline of their income tax returns, there are risks in doing so. If the taxpayer is due a refund, or no balance is due when the income tax return is filed within the extended deadline, then the taxpayer is in compliance and within the terms of the Installment Agreement.
If you owe the IRS money, contact Anderson & Jahde for competent, professional tax help.
[1] Taxpayers are required to pay taxes to the IRS during the year, either through withholding or estimated tax payments. Failing to make required estimated tax payments can also cause a default of the Installment Agreement.