In order to be eligible to resolve an outstanding federal tax liability on a voluntary basis (e.g. Installment Agreement, Offer in Compromise), as opposed to having it forcefully resolved through collection action such as levies, garnishments, and the seizure of assets, the IRS has two basic requirements. The first requirement is that you are in filing compliance. This means that all outstanding tax returns that are required to be filed have been filed. Most people do not have a difficult time understanding this requirement and thus it is typically not an impeding obstacle once it is determined whether or not there are delinquent returns that need to be filed.
The second requirement is that you are current with all required federal tax deposits and/or quarterly estimated deposits. This requirement tends to be a little more difficult for people to completely understand as there are several different possible deposits that may need to be made to be considered current by the IRS. The purpose of this article is to discuss the various deposits that are required to be eligible for voluntary resolution and the reasons why being current with the deposits is a requirement in the first place.
Estimated Deposit Requirements for Individual Income Taxes
The deposit requirements for individuals tend to be simpler than that of a business as there is only one deposit that may be required. If a federal tax liability has been assessed against you personally and you are seeking voluntary resolution such as a payment plan or an offer in compromise, it is a prerequisite that any required quarterly estimated payments be made.
In order to determine if you are required to make a quarterly estimated payment, the first and best step is to review your prior year’s federal income tax return, Form 1040. If the return was filed with a tax liability of over $1,000 (after subtracting federal tax withholding and credits), and you expect the federal withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2015 federal tax return, or 100% of the tax shown on your 2014 federal tax return (only applies if your 2014 tax return covered 12 months – otherwise refer to 90% rule above only), then you are required to make quarterly estimated payments toward your next income tax return as it is presumed that the next income tax return will be similar to the current one.
There are two ways of determining the amount of each quarterly estimated payment that needs to be made. The simpler way is to just divide the tax liability of the last and most recently filed return by four. For example, if you filed your 2014 1040 income tax return with a tax liability of $5,000, you are required to make four quarterly estimated payments of $1,250 toward your 2015 1040 income tax return. If you anticipate your next return to be substantially different than your present return, another means of determining the amount of each quarterly estimated payment is to complete an IRS estimated tax worksheet. This can be found at on the IRS website or you can click on this link. The worksheet is a series of calculations and estimates that will determine the amount of the quarterly estimated payments in an attempt to eliminate any future liability on the next filed return.
If you are an individual whose income is derived from a W2 wage, one fairly simple method of eliminating the need for a quarterly estimated payment is to increase the income taxes being withheld from your wage. The end result of doing this is the same as the quarterly estimated payments that you would have otherwise remitted to the IRS as an estimated payment will instead be automatically be taken by the IRS and applied to your future return.
The required quarterly estimated payments are due on April 15th, June 15th, September 15th, and January 15th. However, you do not have to make the payment due on January 15th, if you file your tax return by February 1st and pay the entire balance due with your return.
IRS Deposit Requirements for Businesses
Similar to an individual, a business may also have to make quarterly estimated payments toward its future income tax return. The same criteria for individual estimated payments apply to a business. However, in addition to being current with quarterly estimated payments for income tax, the business also has to be current with its required federal 941 employment tax deposits and possibly with its 940 unemployment tax deposits. The 941 employment tax deposits are due either on a quarterly, monthly, or semi-weekly deposit schedule depending on the amount of wages that are issued each quarter. IRS Notice 931 explains which category of depositor each business falls under as well as how to comply with the corresponding requirements.
Additionally, the business may be required to make quarterly deposits toward its future 940 unemployment tax return. This is determined by looking at the current quarter’s tax liability. If the 940 unemployment tax is $500 or less during that quarter, you can carry it over to the next quarter and not make a deposit. You can continue to carry the tax liability over to the next quarter until the cumulative tax is more than $500. At that point, a tax deposit is required for the current quarter. The deposit is due by the last day of the month after the end of the quarter. If your tax for the next quarter is $500 or less, you are not required to deposit your tax again until the cumulative amount is more than $500. If the cumulative tax liability never exceeds $500 then it is acceptable to pay the liability with the return at the end of January of the following year when you file the return.
The IRS requires deposit and payment compliance to obtain voluntary resolution for one important and primary purpose. The IRS wants to ensure that a liability is not incurred on a future return. It is a critical requirement for any voluntary resolution of a back tax liability to not accrue any additional tax liability. The IRS does not want to grant voluntary resolution such as a payment plan to resolve a back tax liability if the payment plan is likely to default in the near future when you file your next return with a liability. Thus, the IRS has established these requirements in an attempt to ensure that a future liability does not occur, thereby allowing the taxpayer to adhere to the terms of their approved resolution plan.