There are many individuals – including famous ones – that don’t pay or haven’t paid their taxes in years. Take for instance the late Anthony Bourdain. Before he became a household name with “Kitchen Confidential,” he hadn’t paid his taxes in ten years. He lived with the unrelenting anxiety of the IRS finding out and taking the little money he had to live on.
Until he was 44 year old, Bourdain worked as a chef, lived paycheck to paycheck, and was in some serious debt. “In my daily life, the goal was to muffle the anxiety that I’d feel as I tried to drift off to sleep knowing that, at any point, what little money I had in my bank account could be garnished by the IRS.”
After “Kitchen Confidential” became a hit and the money started to flow, Bourdain said he called up the IRS and his credit card company, paid what he owed and never racked up debt again.
This story has a happy ending – tax wise, that is. But everyone’s tax situation is not Bourdain’s. Although the IRS didn’t spot him on their radar, not every person delinquent of paying taxes will be so lucky. Let’s take a look at what can happen if you neglect to pay them on time.
Under California law, taxpayers have a legal obligation to report and pay contributions and withholdings when due.
If a taxpayer becomes delinquent in the payment of amounts due, the Employment Development Department (EDD) will take appropriate action to collect the full amount immediately.
The EDD recognizes that sometimes it is in the best interest of the state and in the interest of a California taxpayer that it allows an installment agreement to liquidate over a period of time an amount owed by the taxpayer.
A taxpayer can request an installment agreement by phone, by letter or by completing an filing and Installment Agreement Request (DE 927B). Taxpayers must note that installment agreement will not prevent a Notice of State Tax Lien from being filed and that the EDD will continue to offset any state agency and federal tax refunds during the payment period.
That means that the EDD may still take away your potential state or federal tax refund as a payment toward employment tax owed. Any payment from these sources will be really additional payments on top of the payments the taxpayer already makes according to installment agreement.
Installment agreements can be long-term or short-term. A short-term installment agreement may be established during initial contact by the EDD if the tax liability is less than $25,000 for an active business or $10,000 for inactive.
The taxpayer must indicate verbally during conversations with the EDD representative or in writing to the EDD that they will pay the amount owed to the EDD within one year (or 18 months for an audit assessment). The EDD staff or their supervisors have the authority to approve short-term installment agreements without engaging into any complicated process.
However, the installment agreement will not be approved for taxpayers with a history of multiple delinquencies and in cases involving fraud by the taxpayer. It is important to keep in mind that the start date for a short-term agreement will be no more than 10 working days after a verbal agreement is established during conversation with an EDD staff member.
The EDD will establish a long-term installment agreement only when a taxpayer is unable to pay the balance due within the time allocated and the amount to be paid by taxpayer is higher than limits for short-term agreement (over $25,000 for an active business and over $10,000 for inactive).
Naturally, the EDD has higher requirements for long-term agreements than for short-term. To apply for a long-term agreement, a taxpayer will need to submit a written request in which they must explain how the tax liability was established, what action has been taken by taxpayer to resolve the liability, how taxpayer plans to keep current on future financial obligations to the EDD (this applies only to EDD accounts which are active).
The taxpayer must submit financial information on business and on personal assets. For that purpose, they generally must use a Financial Statement (DE 926B), used for individuals, or Financial Statement for Businesses (DE 926C) for an employer who is a business entity.
If instead of filling out these forms and the taxpayer submits their own financial statement, the EDD will accept it, as long as information in the taxpayer's own statement is sufficient to cover everything that is asked for in two mentioned EDD forms.
In addition, a taxpayer must include what is called a good faith payment.
If an entity which enters into a long-term agreement is a corporation, LLC or an LLP, and the remaining balance is more than $10,000 of overall assessable tax liability amount, a form DE 204 must be filed. DE 204 establishes liability of corporate responsible persons in regard to assessed tax liability of the corporation.
In any case, the EDD will also require a written explanation of how the liability was created. The EDD also will require financial statements, personal or business, with documentation regarding financial status such as loan denials, tax returns, bank statements, accountant’s financial reports, etc.
The EDD may require additional supporting documentation regarding financial statement entries. The long-term agreement must be approved by the EDD’s lead senior tax compliance representative or tax compliance supervisor.
Sometimes the tax liability (the amount of tax owed), is a result of an audit assessment by the EDD and the taxpayer is unable to pay the full amount owed. In such cases, the EDD may allow up to 18 months to pay in full with a short-term installment agreement.
Even if the taxpayer is already in some kind of agreement with EDD, terms of that agreement can be renegotiated. However, the EDD looks separately at the audit assessment amount and account balance amount.
The audit portion of the tax liability can be paid in installments for up to 18 months, and any other amounts (account balance) must follow regular guidelines for short-term (up to 12 monthly payments) and long-term agreements (longer than 12 months).
Short-term agreements may be negotiated by the auditor as part of their audit but it must be approved by a supervisor. When other liabilities exist or the taxpayer requests a long-term agreement, the auditor will refer the taxpayer to the compliance representative assigned to the collection case.
Do not forget that the installment agreement may be accepted by the EDD during a phone call. Then agreement will be finalized and a form DE 927 will be sent by the EDD to the taxpayer for signature.
The taxpayer then must make a first payment and sign DE 927. The amount to be repaid under installment agreement includes not only the balance owed, but also penalties.
After an installment agreement is accepted, the EDD will notify the taxpayer about approval and should let him or her know about following conditions:
If the EDD denies an installment agreement, it must contact the taxpayer and explain the denial. If the taxpayer defaults on payments under the installment agreement, then the EDD can go ahead and resume collection efforts.
The EDD considers following events as a default by taxpayer:
Please note that if the EDD finds that you have resources to pay the liability, then you generally must make arrangements to pay the entire amount owed within 30 days.
The EDD will ask the following questions to determine whether you can pay everything at once without installment agreement:
if the answer to at least one of these questions is “yes”, then the EDD will require that you must make arrangements to pay the entire amount within 30 days.
Anthony Bourdain was able to pay off his tax debt in one fell swoop, but in reality most of us can’t rely on a windfall like his to turn our situation around. Remember too, that for ten years before acquiring his fame and fortune, Bourdain said he suffered with his fears and anxiety about his tax debt every day.
Whether you have neglected to pay your taxes for one year or 10 years, and need some help sorting things out, give me a call at Brotman Law. I won’t impress you with my cheesy Bodega sandwiches, but I can save you a few headaches and perhaps a ton of money on your taxes.
Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.
These ten big ideas will change the way you think about your taxes and your business.
Find the articles and videos you need to make the right tax decisions in the learning center.
It is not just about what we do, but who we are, why we do it, and how that benefits you.
Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this website is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter contained in this website.