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.
Paying Your Taxes is Not Optional
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.
Payment Plan Election
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:
- All future deposits and reports are to be filed and paid timely to the EDD.
- A Notice of State Tax Lien will be filed on all unpaid liabilities.
- The EDD will take immediate involuntary collection action if the agreement is not kept, or an unreported improvement in financial condition is discovered.
- The EDD will continue to offset any state agency and federal tax refunds.
- A new financial statement must be provided after 12 months.
- The taxpayer must immediately notify their EDD representative when a significant improvement or deterioration in their financial circumstances occurs.
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.
What is Considered An Installment Agreement Default
The EDD considers following events as a default by taxpayer:
- The taxpayer fails to send the payment.
- The payment is not timely.
- The payment is less than the amount agreed upon.
- A check is returned by the bank for non-payment.
- An active taxpayer fails to file required tax forms on a timely basis without just cause.
- An active taxpayer fails to submit a timely Payroll Tax Deposit DE 88 (DE 88.)
- An active taxpayer fails to submit an Interim Contribution Return (DE 2858) when specifically required as a condition of the agreement.
- The taxpayer provided false, inaccurate, or incomplete information.
- The taxpayer fails to inform the EDD that their financial position has improved. If the taxpayer voluntarily provides updated financial information, the terms of the agreement may be simply renegotiated.
- A taxpayer fails to pay current taxes by the due date, incurring additional liability after the agreement is negotiated.
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:
- Do you have sufficient money of your own to pay this liability?
- Can you borrow the money from other sources to pay the liability?
- Are there other resources available to pay the liability which will not force the closure of your business?
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.
Has Your Tax Debt Become A Daily Grind?
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.