Do not allow your inability to pay your taxes to prevent you from filing on time.
Mark E. Battersby
Although the last bill anyone should ignore is a tax bill, that is
exactly what many optometric professionals and their practices
are doing. What will happen and what should you do if you cannot pay your taxes
It is well documented that the Internal Revenue Service wants
its money immediately and has many tools at its disposal for
collecting any and all tax debts. Less well-known are the legitimate options
that can help avoid the trouble, interest and penalties that accompany unpaid
Contained in our tax laws and rules are procedures for requesting
payment extensions as well as installment payment arrangements that keep the
IRS from instituting its collection process (such as liens and property
seizures) against an optometry practice or its principals.
The IRS is only too happy to calculate the penalties and interest for
all unpaid tax bills, considering few taxpayers are aware that there are, in
general, three separate penalties:
- failure to file penalty
- failure to pay penalty
The failure to file penalty accrues at the rate of 5% per
month or part of a month (to a maximum of 25%, reached after 5 months) on the
amount of tax the return should show as owed. The failure to pay
penalty is gentler, accruing at the rate of only 0.5% per month or part of a
month (to a maximum of 25% reached after 50 months) on the amount actually
shown as due on the return.
If both apply, the failure to file penalty drops to 4.5% per month, so
the total combined penalty remains at 5%. Thus, the maximum combined penalty
for the first 5 months is 25%. Thereafter, the failure to pay penalty can
continue at 0.5% per month for 45 more months, yielding an additional 22.5%. In
total, these combined penalties can reach 47.5% of the unpaid liability in less
than 5 years.
Both of these penalties exist in addition to interest charged for all
late payments. If estimated tax payments were also missed, an additional
penalty is tacked on for missed estimated tax payments. This penalty is
computed at 3% above the fluctuating federal short-term interest rate for the
When it comes to paying the tax bill, and hopefully avoiding penalties
and interest, the options include borrowing or paying by credit card.
Borrowing to pay taxes
Given the rate at which the above-mentioned penalties and interest grow,
it is no surprise that many optometric professionals often choose to borrow
money to pay their taxes. In many situations, the rate of interest paid to a
family member, or even to a bank, is less overall than that which would have to
be paid to the IRS.
Loans from relatives or friends are often the simplest method to pay the
bill. When loans from relatives, friends or the practices
principals/shareholders are not available, a loan from a bank or other
commercial lender might be the answer, although such loans are unlikely to be
made on favorable terms to any hard-pressed taxpayer. Moreover, unless
business-related, interest on a loan to pay taxes is usually nondeductible
There are a number of advantages to paying taxes by credit card,
including the fact that it is convenient. An optometrist, optometric
professional or practice can file early and make a payment by credit or debit
card later, thus delaying out-of-pocket expenses.
Credit card loans are however, likely to carry high rates of interest,
interest that is, in most cases, not tax deductible. While the IRS does not
receive or charge any fees for card payments, so-called convenience
fees are charged by the credit card service providers. While the IRS cannot pay
or reimburse any convenience fee to taxpayers, service providers
convenience fees are a deductible business and individual expense.
Keep in mind that federal tax deposits cannot be made through these
options. Furthermore, amounts not properly deposited may be subject to a 10%
penalty for failure to deposit through an authorized financial institution or
the IRSs Electronic Federal Tax Payment System.
Arranging an extension
The IRS is quite clear: it wants all taxes paid when due or sooner, even
demanding immediate payment when granting extensions of time in which to file
the tax return. Under some circumstances, however, a short-term (120-day)
extension may be arranged. A short-term extension gives an optometric
professional or his or her practice up to 120 days to pay. No fee is charged,
but the late-payment penalty plus interest will apply.
An extension of time to pay is also available to those who can show that
payment would cause undue hardship. Qualifying for an undue
hardship extension means an extra 6 months in which to pay the tax shown as due
on the tax return. The failure to pay penalty will be avoided, although
interest will still be charged.
Should the IRS determine a deficiency, taxes owed in excess
of the amount shown on the return, the undue hardship extension can be as long
as 18 months and, in exceptional cases, another 12 months can be tacked on.
However, no extension will be granted if the deficiency was the result of
negligence, intentional disregard of the tax rules or fraud.
It is not enough to show that it would just be inconvenient to pay your
tax when due; payment must be shown to be a real hardship.
Paying in installments
The IRS will often accept installment payments for some tax debts.
Generally, the IRS allows taxpayers to make installment payments on the taxes
owed if they are $25,000 or less. In fact, the IRS is required to enter
into a guaranteed installment agreement, where the tax liability is
$10,000 or less, not counting interest and penalties.
If more than $25,000 is due, payment plan options also exist, although
the IRS must first determine eligibility.
Unfortunately, while partial-pay installment agreements are relatively
easy to obtain, the IRS can re-evaluate the terms every 2 years. If, for
example, the IRS thinks a taxpayer can afford bigger payments, then the
partial-pay installment agreement might have to be renegotiated. The taxpayer
can also request re-evaluation at any time should circumstances change to such
a degree that the agreed-upon payment can no longer be made.
Negotiating with the IRS
Yes, negotiating is an acceptable practice when it comes to tax bills.
An offer-in-compromise is an IRS program that many optometric professionals and
their practices have used to settle their tax debts for a fraction of face
value. It cannot, however, be requested beforehand.
Naturally, the taxpayer must be in compliance and must have the ability
to pay and to borrow. For example, the taxpayer must be current on estimated
tax payments or federal income tax withholding, must be making payroll tax
deposits on time and must have filed all tax returns when making an
Like any creditor, the IRS prefers a partial payment to no payment at
all. Thus, the IRS might be willing to settle a tax bill for less than the full
amount if the conditions listed in the accompanying table are met.
Establishing reasonable cause
If the principal or the optometry practice can demonstrate that a
reasonable cause exists to abate or remove tax penalties, they may be surprised
to find those penalties forgiven by the IRS. The IRS determines if reasonable
cause exists by considering all the facts and circumstances.
Ignorance of the law is generally not an excuse to avoid meeting
ones tax obligations. However, when combined with other factors such as
the taxpayers level of education, whether the taxpayer was subject to
this tax before, if the taxpayer was previously penalized by the IRS, if there
were recent changes in the law or forms that the taxpayer could not reasonably
have known about, or if the complexity of the issue involved was substantial,
penalties may be abated.
Avoiding serious consequences
No optometry practice or its principal should allow an inability to pay
their tax liability in full keep them from filing all tax returns properly and
on time. It is also important to remember that an extension of time to file tax
returns does not extend the time to pay the tax bill.
Generally, optometry practices or their principals have several
alternatives for resolving unpaid taxes: installment agreements, partial-pay
installment agreements or an offer-in-compromise. Two other options, filing for
bankruptcy or being declared not currently collectible by the IRS
are far less desirable strategies.
The complexity of the tax rules and the many options available to every
optometric professional and practice unable to pay their tax bills obviously
require professional guidance.
- Mark E. Battersby can be reached at PO Box 527, Ardmore, PA
19003-0527; (610) 789-2480; email: MEBatt12@earthlink.net.