Offer in Compromise - should this be filed at same time as filing taxes?

[Opus 17]

@bhuether 

1. The IRS annualizes your income, although if you file form 2210 properly, you can reduce the effect.  However, if you don't annualize your income, the entire payment was due June 15, and the entire amount is past due on Sept 15 and January 15.  Annualization may be in your favor in this case.  I can't tell for sure without doing a lot of calculations.

2. Your tax liability for 2020 is line 24 of form 1040.  Your tax liability for 2021 would also be line 24 of your 2021 return.  (Your tax liability is what you actually pay to the government regardless of when you pay it.  If you had $5000 of payments and got a $1000 refund, your liability was $4000.  If you had $5000 of withholding and payments and owed a further $1000, your tax liability was $6000.) 

For 2021, you need to pay up to 90% of your 2021 liability, or 110% of your 2020 liability, to avoid an underpayment penalty.  It sounds like your 2020 income was probably much lower than 2021, so I wonder if you can make an estimated payment now that will bring your total of 2021 withholding and payments up to 110% of your 2020 amount.  That will block the underpayment penalty, and probably interest, from accruing before April 18, 2022.

After April 18, 2022, you will be liable for a failure to pay on time penalty, which is the same terms as the underpayment penalty (0.5% per month plus interest). The failure to pay penalty is assessed even if you have an extension to file, because April 18 is also the payment deadline and a filing extension is not a payment extension (there are no payments extensions, in fact).    But, if you can afford to make a payment now based on your 2020 information, that will make sure that the penalty and interest clock starts on April 18, 2022 and not June 15, 2021.  

3. That depends on how much you really owe. Taking account of all your withholding and payments so far, how much more would you have to pay by February 15 to get the total to equal 110% of your 2020 line 24?

4. Only you can make that decision given your total facts and circumstances (as well as the ability to work other jobs, etc.)

5. "Curious: Does the IRS have an online tool that lets you see in real time your debt status (penalties, interest, etc)?"  Yes, you can review your account online, although I don't know how often it's updated.  And for now, it won't show a balance because you haven't filed.

https://www.irs.gov/payments/your-online-account

Two other points to be aware of:

6.  If you are "permanently and totally disabled" under IRS regulations, you are exempt from the additional 10% penalty on early IRA withdrawals.  For the IRS, permanently and totally disabled means unable to perform substantial gainful employment.  This is not necessarily the same thing as a VA disability, because some forms of medical disability will still allow you to work.  Only you or your doctor can determine if you qualify for being disabled for income tax purposes.

7. If you make an IRA withdrawal directly to the IRS to pay a tax debt, that is also exempt from the 10% penalty for early withdrawals.  So I would probably not make any IRA withdrawals to pay income taxes, until you have your OIC or payment plan, and you can arrange a direct transfer to the IRS.  Your money would go a little farther that way.

[Opus 17]

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@bhuether wrote:

Or maybe I am interpreting "current year" wrong.  I thought it meant to have submitted estimated payments for the current tax return you are working on. I am working on 2021 return, don't expect any estimated payments in 2022 (unless I have to withdraw from IRA again to pay down this balance!). Or they mean 2022 as the "current year".

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This is where you need to consult with an experienced tax accountant, or since you are overseas, maybe the taxpayer advocate.  The requirement to receive a bill suggests that you can't apply for the OIC until you file your 2021 tax, pay whatever you can afford (if anything) and then get a bill because you didn't pay it all.  Maybe in that case, "current year" means you must be current on 2022 before you can apply for an OIC for 2021.  But I am not an expert here and maybe the TAS can help you. 

[bhuether]

Hi, about this: "For 2021, you need to pay up to 90% of your 2021 liability, or 110% of your 2020 liability, to avoid an underpayment penalty." For what it is worth, in 2020 I had a tax refund, no liability.

And this: "how much more would you have to pay by February 15 to get the total to equal 110% of your 2020 line 24?"  In 2020 I owed nothing.  My tax bill situation is only for 2021 following my May 2021 Roth IRA redemption. 

About 7 below: To make a reasonable offer for an OIC, I would have to tap into some portion of my IRA again either way.

Here is an interesting question: If I paid $20K by April 18, and then sometime much later IRS approved an OIC for the amount $20K, would I already be in the clear, with no penalties?

[DianeW777]

In your statement you said you had no tax liability.  'For what it is worth, in 2020 I had a tax refund, no liability.'

However, a refund does not indicate zero tax liability.  Please check line 24 , Form 1040 for 2020.  This is your tax liability for 2020 and if that line is zero, then any dollar amount paid in advance would be more than required.

Penalties begin upon the date of late payment, which for 2021, will begin on April 18, 2022.  The IRS will again use their discretion when determining the OIC. Once the OIC is accepted you will be considered as paid in full for only the period requested.

As indicated by @opus_17 you might want to consult with an experienced tax accountant, or since you are overseas, maybe the taxpayer advocate service (TAS).  Information is added here for your convenience.

1. You can click here to begin: TAS Qualifier Tool. or 
2. Submit a request for assistance - Form 911 Request for TAS Assistance (instructions are included)
3. Locate the local TAS Office for your area

This will get the process started for you.  It's not going to be a fast process because they are handling a large volume at this time. 

If you do not hear from TAS within one week of submitting Form 911, contact the Taxpayer Advocate office where you originally submitted your request. Incomplete information or requests submitted to a Taxpayer Advocate office outside of your geographical location may result in delays.

[bhuether]

Hi, line 24 for 2020 return was 0

[bhuether]

Hi Diane,

In reading this,

"Please check line 24 , Form 1040 for 2020.  This is your tax liability for 2020 and if that line is zero, then any dollar amount paid in advance would be more than required."

I am trying to reconcile with what IRS writes about estimated taxes. They say

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Who may need to pay estimated taxes

Individuals, including sole proprietors, partners and S corporation shareholders, may need to make estimated tax payments if:

• they expect to owe at least $1,000 when they file their tax return.
• they owed tax in the prior year.

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And here is where I am just not sure.  The language "they expect" is not really clear. In April 2021 I didn't "expect".  Only in late May 2021 did I "expect".  

In any case I am making some payment immediately, just to hedge my bets...

[bhuether]

Hi,

I noticed this when reading about using IRA to pay tax debt:

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Can you withdraw money from IRA to pay taxes?

If you have unpaid federal taxes, the IRS can draw on your IRA to pay the bill. The 10% penalty won't apply if the IRS levies the money directly. 4 However, you can't withdraw the money to pay the taxes in order to avoid the levy. In this case, the exception wouldn't apply, and you'd be on the hook for the 10% penalty.

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Reading this leads me to believe I can't withdraw the money to pay the tax. Seems I would have to wait for IRS to levy the debt.  I wonder if I can request the IRS to levy?

At every turn seems to be new roadblock...

[JohnW152]

@bhuether 

You’re somewhat misreading the quote; you can withdraw the money to pay the tax debt, but you won’t be eligible for the 10% tax exception.

See Exceptions to the 10% Additional Tax in Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs | Internal... for more information.

That said, as to whether you can request that the IRS issue a levy, so you can avoid the penalty:  You can probably request it, but generally nobody wants an IRS levy.  According to the IRS’ Levy page, 

An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property.

It’s not like a cafeteria plan where you can pick and choose what actions you want to be taken.

[bhuether]

Is the IRS so difficult to work with, such that one can't have a down to earth discussion, where I would tell them, "Look, I don't have home equity, I already sold my foreign plated car - and only car - to raise funds to pay my debt to you, my current income is pretty much right around what you compute as part of your OIC calculator in terms of allowable expenses, so really nothing to seize there, which leaves me with mutual fund assets, which your OIC calculator indeed shows as the assets that would be used in the offer estimation.  So since we already know me paying the debt in the OIC payment timeframe amounts to me tapping into Roth IRA assets, just let me take the money from there now penalty free, as opposed to me purposely waiting for balance due notices, ignoring them to trigger your levy machinery. And thanks for allowing such a rare miracle of a penalty free action."

How odd that achieving the penalty waiver amounts to this oddly probabilistic approach of levying the very asset that my OIC would be contingent on.  So if IRS approves my OIC, they would force me to take a 10% penalty?

[ZoltanB45]

If the IRS levies your retirement account to pay the back taxes, then there won't be the 10% early withdrawal penalty. You cannot just take it out early yourself to pay them. If you approach them and ask them to take it out, then they might do so and only then, you won't be additionally penalized.

However, if the OIC has not been accepted yet, it may open the door for them to take the entire tax liability. 

Look at 5.11.63 in the following link for further guidance from the IRS regarding the matter. Levying from Retirement