How to Deal with Back Taxes Owed ?

Though Total Tax Solution & Company is best known for dealing with the IRS on behalf of our clients who are seeking IRS tax debt relief, the reality is that if you owe back taxes to the federal government, there’s an excellent chance you also owe money to some other taxing authority, such as your state or local governments. About half of the clients who come to us for back tax help owe taxes to more than one entity. It could be state income tax, sales tax, employment-related taxes, or a combination of several state-specific taxes. Whatever it is, you probably already know about it, because most states tend to be more aggressive with their collection efforts than the IRS is. States also tend to charge more in interest and penalties that the IRS does. That often comes as a surprise, but the reason is very logical when you compare the difference between a state’s budget and the federal budget: The amount you owe to a state is likely to be more significant to the state than the amount you owe to the IRS is to the federal government. Also, states typically do not have the collection resources the IRS does in terms of liens and levies, so they are likely to harass you sooner and to a greater degree than the IRS does.

The first step in dealing with other taxing authorities—much like it is with the IRS—is to be sure that all of your state tax returns have been filed. As part of this process, if you are an employee in a state with state income tax, be sure you have received accurate withholding information from your employer and that the information you have matches the information your employer has reported to the state. Beyond that, be aware that dealing with state and local taxing authorities can be quite different than dealing with the IRS.

Once you are in compliance with state regulations regarding filing returns and have determined what you owe in back taxes, the next thing you should do is check to see if your state offers any sort of an amnesty program. Under these programs, states will take actions such as forgiving interest and penalties if you pay the tax due by a particular date—something the IRS doesn’t do. If your state doesn’t have an amnesty program, you still have options.

Most states have programs similar to the IRS’ offer in compromise and installment agreements, but the state programs are not going to be exactly the same as the federal counterpart. That means qualifying for an OIC with the IRS doesn’t mean you’ll automatically qualify for it with your state. By the same token, you may not qualify for an OIC with your federal taxes and yet qualify for it with the state. Also, the state’s terms may be different—for example, many states that will accept OICs or installment agreements do so with the requirement that the tax be paid within a much shorter length of time than the federal government allows.

Remember that, just as the federal government can, states can also put liens on your property and levy your bank accounts and wages. States can also ask the IRS to send any refunds you may be due to the state to pay off your state liability. I recommend that you do everything possible to avoid a state lien or levy. It’s been the experience of the tax professionals at Total Tax Solution that most states are far more reluctant to release a levy or garnishment before the tax liability is paid in full than the federal government is, even after payment arrangements have been made.

Something else a state can do to delinquent taxpayers is to not renew certain licenses under your tax obligation is settled. Back state taxes can put a lot of licenses in jeopardy, including various occupational licenses and even driver’s licenses.

If you are a business and owe back sales tax, you are at risk of what’s called a cash register levy. That’s when the state sends a representative into your business to stand at the cash register and take whatever cash comes in. When you think about the impression that would make on your customers, you’ll understand why I am saying to do everything you can to avoid getting to that point. The states are also much more likely to shut down a business for delinquent sales tax than the IRS is for other delinquent taxes.

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