What You Can Do If You Have More Than One Government Agency Coming After You For Taxes

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Every year, as April 15 comes and goes, I get questions from people who owe a substantial amount of taxes and need guidance on handling the debt. Some of them have both state and federal income tax delinquencies and they wonder how to negotiate with both at the same time. Recently, I talked to a person who had tax bills with four different tax agencies for income and employment taxes.

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Today’s column will discuss how to deal with tax debts from multiple tax agencies and which debts to prioritize. Please note that each person’s situation is different and may require a change in strategy.

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Smaller Tax Bills Should Come Before Larger Ones

This is commonly known as the snowball method of paying down debt. When I say smaller bills, I mean bills that can be paid within six months or less. Try to pay smaller bills first because one bill is better than multiple bills.

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Employment Taxes Come Before Income Taxes

Other things being equal, I recommend paying down employment or payroll taxes first. Tax departments take these balances very seriously because in these situations the taxpayers are holding employee money that were withheld to pay their taxes. These cases are more likely to get sent to local revenue officers, even for small balances.

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But the worst part about delinquent employment taxes that if the balance is large enough, the tax agencies can make the taxpayer personally liable for the taxes held on behalf of employees, usually known as trust fund taxes. Trust fund taxes are nondischargeable in bankruptcy which makes them slightly more difficult to discharge than student loans.

Trust fund taxes include employee’s federal and state payroll or FICA taxes, and income tax withholdings. If the business is a separate limited liability entity, the responsible parties will be liable for the trust fund taxes. Responsible parties are typically the people who have the authority to pay business debts.

State Taxes Usually Come Before Federal Taxes

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In most cases, state tax bills are smaller than their corresponding federal taxes so it is better to pay them off first so the taxpayer can focus on paying the other exclusively.

Newer Taxes Come Before Older Taxes

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People with tax bills from more recent years should address these first and make sure that they will not have the same problem in future years. Generally, tax agencies want taxpayers with delinquencies to “stay current” and are usually willing to be flexible with back debts.

On the other hand, older taxes should be treated with special care as they may be eligible for cancellation due to reaching the collection statute of limitations. The IRS generally has 10 years from the date the tax return is filed to collect. However, most tax collectors are aware of this so they may take actions to make sure the older taxes are paid first. The current policies of the IRS generally allow taxpayers to enter into a payment plan based on their ability to pay even if it means older tax years are in danger of being uncollectible due to the statute of limitations.

Tax Bills Assigned To Special Collection Agents Should Come First

When you call the IRS or the state or city equivalent to resolve a tax bill, you will talk to a different representative whenever you call.

But if your bill is large enough or requires special attention (such as delinquent employment taxes mentioned earlier), your case will be assigned to a special collection specialist. The IRS calls these people revenue officers who use pseudonyms. They generally have detailed information about your finances and in certain situations can obtain them from banks and third parties via summons. Also, they can go through the legal procedures faster which means they can eventually issue bank levies, garnishments, or payment intercept orders to third parties.

Surprisingly, working with collection agents is actually preferable over a representative at a centralized call center for a few reasons. They are generally more responsive with a direct line. This means you won’t have to wait on hold for several hours. Also, these agents generally want to close a taxpayer’s file as soon as possible, so they are willing to work with people who are cooperative. But be prepared to talk to a manager if the agent is being unnecessarily aggressive.

While there are ways to negotiate with multiple agencies, each situation is different and may be worth consulting a tax professional who may have inside knowledge. But most importantly, do not ignore your tax bill, especially if you cannot pay it within a reasonable period.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

Topics

Back Taxes, Internal Revenue Service (IRS), Steven Chung, Tax Law