Debt Code

[MargaretMort]

Client called this morning. He owes for 2008 taxes and called J.B. Holmes to see what they can do for him. The person he is working with said they were able to get copies of his 2006 and 2007 tax returns but the 2008 hasn't been filed.

I e-filed the return April 11 and it was accepted April 12. The debt code is I. All the other debt codes are N. I don't have any idea what the debt code means nor why the company can't get a copy of the 2008 Tax Return. Any help would be much appreciated.

This client also said JB Holmes suggested he become an LLC or Corporation and wanted my opinion. As I am a tax preparer only I don't have an opinion. I must add that his business is lawn care, single proprietor with no employees.

I am truly at a loss for any help I could give him. He always owes as he always is making payments to the IRS during the year to pay off the previous years' taxes so he can't make estimated payments. I believe he had paid off the 2007 taxes owed.

Thanks.

MM

[jainen]

>>he always is making payments to the IRS during the year to pay off the previous years' taxes so he can't make estimated payments<<

That is something you can help him with. Last year's liability will only accrue interest after a certain point, while 2009 remains subject to underpayment of ES and late payment of everything in addition to interest. Since he is only in arrears one year and has the ability to pay, his basic collections option is a payment plan, whether formal or not. The IRS is not in a big hurry for 2008, so slow it down to make room for the estimates. The total he has to pay will be substantially less.

[MargaretMort]

Actually, some years ago the local IRS office told him to get his in arrears taxes paid off and not worry about making ES payments. My personal feeling is that he is wasting his money dealing with Holmes but he didn't ask my opinion on that.

The majority of what he owes is SS and I don't see how Holmes is going to get that changed.

My understanding of owing past taxes is that the IRS takes a dim view of running a balance owed each year and gives taxpayers a hard time if they haven't paid off the previous year before this year's comes due. We have never owed something we can't pay so I have no personal experience. MM

[JohnH]

I agree with jainen. IRS told him to concentrate on the prior years because they don't like old stuff lying around and like all bill collectors they know that the older something gets, the harder it becomes to collect. They don't mention that the client essentially doubles up on penalties by doing it this way. Of course, he may just be telling you what pops into his mind (unless you heard the conversation yourself). I've found that people who talk with the IRS themselves often have very selective memories.

The best cash management technique would be to get compliant on the current year and try for a payment plan for all the old liablities. In the long run, he will pay less in penalties (although the interest will be roughly the same), and he can get in the habit of paying on time. The problem with this approach is that if he habitually pays only when the wolf is at the door, then an organized approach like this won't do him any good either. So you have to decide at some point if any solution will work for him.

Money he pays to Holmes could be much better spent paying down his tax liability and paying you to help him get compliant. The advice to form an LLC or a corp won't help him very much form a tax standpoint. There may be lots of general business liability issues that make it desirable, but if he just chronically delays paying his taxes, then another entity will just give him more opportunity to conveniently get "confused". This type of situation could cause him to dig an even deeper hole and expose himself to an overlapping set of penalties if he does things in exactly the wrong way.