Tax Day Is Suspended, but Taxpayers Can Use Additional Time to Fix Past Tax Problems
April 15, 2020 by Joshua Smeltzer
It has been widely publicized that the IRS has postponed all April 15, 2020 tax deadlines until July 15, 2020. Hundreds of additional tax deadlines—yes there are that many deadlines to keep track of—are also extended. The IRS has also suspended most enforcement action and stopped processing paper returns, paper correspondence, and even answering the toll-free phone lines. Essentially, today’s usual deadlines are unusually extended until July 15th and the IRS is on standby. I’ve worked on both the government and the private side as a tax lawyer for over 15 years and I’ve never seen a Tax Day like this.
If you are due a refund, hopefully you’ve already filed your return electronically and are waiting for the IRS to process that return. The IRS is still processing returns, if they are electronically filed. If you owe money, you have until July 15th to figure out filing and payment or can still extend the filing deadline to October 15th but not the payment deadline. As both taxpayers and the IRS hit pause on this Tax Day, there is a unique opportunity to assess past tax mistakes and make a plan to fix them when the IRS reopens.
Unfiled Returns – Especially for High Income Taxpayers
Before the COVID-19 pandemic was in full-force the IRS announced that it was making high-income (i.e. over $100,000 in income) non-filers a priority. In fact, the IRS indicated that it would be making house-calls to such individuals to encourage compliance. If there are statutory assessment deadlines the IRS may still act on assessing those amounts to protect its interest. However, according to the new Taxpayer First Initiative, new audits, liens, and levies will not follow those assessments until after July 15, 2020. Therefore, if you have unfiled returns, now is the time to take stock and file those returns. Many tax professionals are still working remotely and are likely available to help process your information and answer questions during this pause on IRS enforcement.
A virtual currency compliance campaign was announced by the IRS in 2018. This campaign involved both outreach and civil and criminal examinations. Before COVID-19 the IRS used John Doe Summonses and sophisticated software to find the identities of cryptocurrency investors that may not be properly reporting. The highly publicized Coinbase summons resulted in disclosure of 13,000 customers to the IRS through a John Doe Summons. Once the IRS is up and running again there will likely be more summonses to find those not properly reporting their cryptocurrency. The IRS also sent 10,000 letters to taxpayers indicating that they may need to evaluate their cryptocurrency reporting and fix errors. More of those letters can certainly be expected when the compliance campaign starts up again.
There is a need for more guidance on cryptocurrency reporting that will probably be delayed by the current Pandemic. However, at the very least, taxpayers must know when they purchased cryptocurrency, how much they paid, and what they received in return. Taxpayers can take this additional time to evaluate past cryptocurrency reporting or gather information to amend returns or plan for voluntary disclosure. There are, of course, many more complicated situations if you’ve invested in cryptocurrency for a long time or have a unique factual situation. However, given the potential civil tax penalties and potential criminal implications it makes sense to deal with any failure to report or questions about reporting now.
Outstanding Tax Liabilities
Taxpayers who have filed their returns, reported an amount due, but failed to pay full amounts owed can decide on a path to full compliance. The IRS offers two primary alternatives to enforced collection (i.e. liens and levies) – Installment Agreements and Offers in Compromise. In some situations taxpayers can have their debts deemed currently uncollectible—but that is rarely granted.
Installment Agreements allow taxpayers to spread the amounts owed over a monthly payment plan that can extend, in some cases, as long as six years. Certain additions to tax (e.g. interest and penalties) may still apply until the full amount is paid but the IRS will generally forego enforced collection as long as there is no default of the agreement. The IRS requires a taxpayer seeking an installment to submit financial information on IRS Form 433-F or Forms 433-A and 433-B if the amount owed is particularly high. Taxpayers can use the extended time to gather this financial information and determine a workable monthly payment to request from the IRS when collection starts up again in July.
Offers in Compromise (OIC) request that the IRS take an amount less than is owed in satisfaction of the full amount owed. The taxpayer must convince the IRS that the reduced amount now is in the governments interest and a better alternative to current collection. Financial information will need to accompany the request, usually Forms 433-A and 433-B, to show an inability to pay and financial outlook. The current pandemic has negatively impacted many taxpayers and a reasonable ability to pay back taxes may no longer be possible. An OIC may allow for a reduced payment of tax liabilities owed in exchange for avoiding enforced collection while putting things back in order post-COVID-19.
Of course, every taxpayer’s situation is unique and a taxpayer must weigh a myriad of risks in disclosing and resolving past tax problems. If there are potential criminal implications, the tax problems are even more delicate and steps must be taken to protect confidential conversations. However, while the IRS has suspended deadlines and enforcement it is the perfect time to seek advice and find a plan to put past tax troubles behind you.