Tax Return Filing, Compliance and Resolving Tax Debts

The first requirement for resolving an IRS or state tax debt is tax compliance. Contrary to what many people think, if you owe back taxes, your first priority should actually be paying the current year. Those that don't withhold or pay their current taxes often find themselves in a viscous cycle of constantly struggling to re-pay back taxes and continually owing when it comes time to file again.

It doesn't do the IRS, the State or the taxpayer any good to reach an agreement on a settlement or an installment agreement if the taxpayer continues to owe taxes year after year. It is therefore, generally, a requirement, that before any agreement can be reached, the taxpayer must be up to date with all return filing and estimated payments (if required).

If you are unable to pay all of your back taxes and meet your current deposit requirements, the best thing to do is to focus on keeping up with your current taxes, isolate the back debt, and then make reasonable payments to pay it off over time. This rule applies to all types of taxes, business (941, 940, 1120, etc.) and personal (1040).

If you owe a lot of back taxes, perhaps spanning multiple years, and the amount owed is more than you will ever be able to pay, a settlement may be the best way to resolve your debt. Settlements, frequently referred to as an Offer in Compromise, are offered by the IRS and many states. However, in order to submit a tax settlement, all missing tax returns must be filed and up to date. This means that you must file a return for any year or period when a return was required. Determining which returns must be filed will often require some research by the taxpayer or their representative.

Many people get stuck at this step because they have lost records, or haven't kept up with their record keeping and bookkeeping. Our tax preparation department at Washington Tax Services, specializes in filing back tax returns and deals with these issues everyday. When filing back returns it is important to keep in mind the overall strategy of how the taxpayer intends to eventually resolve any debt owed.

In a best case scenario, filing the tax returns can eliminate a taxpayer's debt entirely. If a taxpayer has not filed a return and income is reported to the IRS or State. The IRS or State will often just file a tax return automatically. The IRS term for this is SFR or Substitute For Return (some say Service Filed Return). These returns don't take any expenses or deductions into account and often result in a large liability for the taxpayer. Often, filing the return can wipe out the debt or reduce it significantly. In these cases it is worth the time to do the extra work and categorize every expense to get the maximum benefit possible out of filing.

In other cases, the benefit of categorizing every expense may be small in relation to the effort required to put together all of the necessary records. This is especially true if there are multiple years to file. We always want our tax returns to be as accurate as possible, but sometimes it is more important to get a return filed than to get it perfect. You can always amend a return if more info comes to light which would lower the liability. We suggest applying the same rule to record keeping as we do to paying - Focus on the current year first, once that's caught up, work on the back years.

For questions about tax compliance, tax return filing, requirements for IRS or State Settlements please contact us at 888-282-4697 or fill in the contact form on this page.