This is important. We need to look at delinquent state and local taxes and understand how they are treated when negotiating a resolution with the IRS. Next time an IRS collections agent tells you they’re not, you’ll know what to say.
As you might expect, taxpayers who have IRS liability many times have state or local liability as well. For a long time, the IRS did not recognize payments taxpayers were making towards state liability as an allowable expense when determining how much they could afford to pay the IRS to pay down back taxes.
Taxpayers ended up with monthly tax payments to the state plus monthly tax payments to the IRS and they couldn’t make both payments, usually defaulting on one or the other.
Why was this happening? It was happening because the stubborn IRS was not recognizing the state tax payment as a legitimate expense to be considered in negotiating a resolution to the federal tax deb.
Well, guess what happened…the Fresh Start Program happened!
See a theme here? The Fresh Start Program really was a revelation for taxpayers.
The Fresh Start Program gave taxpayers greater strength in negotiations. In turn, it gave them access to more reasonable outcomes for outstanding tax liability – one which they could actually adhere to without default.
Here’s what the IRS came up with regarding state and local delinquent tax payments as allowable expenses.
Payments for delinquent state and local (county or municipal) tax liabilities are generally allowed when taxpayers meet the following circumstances:
- They owe both delinquent Federal taxes and delinquent state or local taxes, and do not have the ability to full pay.
- They are cooperative and provide complete financial information.
- They advise the IRS that they owe delinquent state or local taxes and provide verification of the state or local tax liability, and agreement.
But it’s not that simple. The IRS does not allow delinquent state/local payments as expenses on a dollar for dollar basis. Why would the IRS ever make things easy!
The procedures are considerably complicated. Here’s how to determine how much credit to give the taxpayer for delinquent state and local tax liability:
First, determine net disposable income on Form 433-A, Collection Information Statement for Wage Earners or Self-Employed Individuals, or Form 433-F, Collection Information Statement. Do not include any amount that is being paid for outstanding state or local tax liabilities in the calculation.
- Next, calculate the dollar amounts for the IRS and state or local payments based on the total liability owed to each agency (including penalties and interest to date).
- Finally, use the net disposable income and a percentage of IRS and state or local liabilities to taxpayer’s total liability to calculate the payment amounts to use as an expense.
But the determination procedure does not stop there –
There are four different scenarios that must be taken into account to calculate how the state and local monthly payment is determined. Let’s take a look at these scenarios one by one.
- If the taxpayer does not have an existing agreement for payment of the delinquent state or local tax liabilitys, and provides a complete Collection Information Statement (CIS) and verification of state or local tax liabilitys, then follow procedures in IRM 5.15.1.10(4)(b) to determine the calculated percentage amount that will be listed as the allowable monthly payment for delinquent state or local taxes on the CIS.
- If the taxpayer has an existing agreement for delinquent state or local tax liabilitys, and that agreement was established after the earliest IRS date of assessment, and the payment amount on the state or local agreement is less than the calculated percentage amount, then the monthly amount due on the existing state or local agreement will be listed as the allowable delinquent state or local tax payment. The payment to the IRS will be increased by the amount allowed for the monthly state or local payment one month after the date the state or local liability is scheduled to be fully paid.
- If the taxpayer has an existing agreement for delinquent state or local tax liabilitys, which was established after the earliest IRS date of assessment, and the payment amount on the agreement, is more than the calculated percentage amount, then the amount listed as the delinquent state or local tax payment will be the calculated percentage amount. The IRS guidance says that the taxpayer can use the amount the IRS allows for Miscellaneous expenses under National Standards to pay the additional amount due for the delinquent state or local tax payment. The payment to the IRS will be increased by the amount allowed for the monthly state or local payment one month after the date the state or local liability is scheduled to be fully paid.
- If the taxpayer has an existing agreement for delinquent state or local tax liabilitys, which was established prior to the earliest IRS date of assessment, and allowing the amount on the existing state or local agreement will not result in the case being reported uncollectible, then allow the existing state or local tax payment and increase the IRS payment one month after the date the state or local liability is scheduled to be fully paid. See IRM 5.15.1.10(4)(c) and (d) if allowing the state payment will result in the account being reported Currently Not Collectible (CNC) due to hardship.
The procedures for determining how much to allow on the expense side for state and local delinquent tax payments are considerably complicated.
It’s a concept that many taxpayers don’t understand…for that matter, many IRS collections representatives and Revenue Officers don’t understand it either.
That’s why YOU need to understand it and explain it to them when they don’t want to deal with trying to figure it out.
Allowing payments to the state and local taxing authority to be included as expenses was a BIG win for taxpayers and it continues to provide relief when determining disposable income in negotiating a tax liability resolution.
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