For many individuals who owe back taxes to the IRS, the culprit behind the tax debt is the estimated tax payment. Or, more accurately, it is the inability to make sufficient estimated tax payments that causes a tax debt when a tax return is filed. For those who are self-employed or business owners, “estimated tax payments” is likely a familiar, yet distasteful, term. Because self-employed individuals do not have an employer withholding payroll taxes for them, they must submit tax payments to the government on their own.
The IRS considers the income tax a “pay-as-you-go” tax. Meaning, generally speaking, whenever a taxpayer has income, the taxpayer should pay tax. Wage earners see this principle in effect whenever they receive a paycheck with the everpresent tax withholdings.
For the self-employed, the IRS generally requires a quarterly estimated tax payment to fulfill the “pay-as-you-go” mandate. It can be very challenging to write a check to the government for a large amount once every three months, even when the funds are available. However, if you owe back taxes to the IRS, it is critical to start (or continue) making estimated tax payments. There are a number of reasons why making estimated tax payments is key to resolving IRS tax problems.
First, making sufficient estimated tax payments will prevent new tax debt. Although this sounds simple enough, it is difficult to over-emphasize its importance. The IRS does not look favorably upon taxpayers that incur debts year after year. Also, future revenue is of immeasurable importance to the government; as such, the IRS puts a great deal of effort in preventing future revenue from drying up. Another good reason to avoid new debts is that it saves money in the end. New IRS tax debts mean new failure to pay penalties and more interest. Lastly, the IRS has a longer amount of time to collect new debts than it does old debts.
Second, the IRS generally will not agree to a formal tax settlement if estimated tax payments are not being made. This is especially the case for the Offer in Compromise program. Many filed Offers in Compromise fail for no other reason than the taxpayer is behind on estimated tax payments. It short, the government is saying, “Why should we agree to a tax settlement with someone who will continue to incur more debt?”
Third, paying estimated tax payments helps avoid a common tax levy dilemma. Oftentimes the IRS will issue a levy against a bank account or income source, but refuse to release the levy until estimated tax payments are made. But now, the taxpayer cannot make an estimated tax payment because his or her money is tied-up in the levy. This can be a very difficult situation to escape from. While paying estimated tax payments alone may not prevent the IRS from issuing a levy for back taxes, it can speed-up the levy release process.
IRS Tax Debt
IRS Tax Settlement
What is an IRS Tax Debt?