What to do when your client cannot pay their taxes timely June 2018 Tax News

What happens when your client has a balance due with their return and unforeseen events or other circumstances prevent them from paying their tax liability on time? When this occurs, it's important to remember that even if your client cannot immediately pay what they owe, they should always file their tax return on time and pay as much as possible with their tax return. By doing this, they will save money in penalties and interest.

One option that we recommend for your client is to borrow the amount owed from a private source or pay with a credit card, including Visa, Master Card, Discover, and American Express.

Another option is an installment agreement (IA) with us. An IA allows your client to make monthly payments if they are unable to pay their tax liability in full. We encourage taxpayers to make the largest monthly payment possible, because applicable penalties and interest will continue to accrue on the amount owed until paid in full, even though an IA is in place. In addition, we will keep any state tax refund(s) due your client and apply it to the balance owed. We may also submit a request to the Internal Revenue Service to offset your client’s federal refund and apply it to their state taxes.

We generally approve monthly payment IA requests if the balance owed is $25,000 or less and can be paid within 60 months, assuming your client is unable to pay in full and has a good compliance history. We generally do not file liens on these taxpayers’ accounts. If your client falls outside of the IA criteria mentioned above, they should provide full financial disclosure by completing and submitting a Financial Statement (form FTB 3561) along with copies of bank statements and any other documentation that may be needed to prove their financial situation. To learn more about Financial Hardship, see our last month’s Tax News article: “New” Financial Hardship Evaluation Enhancement. Information regarding available payment options, including IAs, is available on our website. IA's can also be set up using our automated phone line at 800-689-4776. Information is available in both English and Spanish.

What happens when your client does not pay the amount owed and either cannot or does not set up an IA? In these situations, depending on the amount owed, we may record a Notice of State Tax Lien(s) in the county where your client may own real property, levy financial accounts, or issue an Earnings Withholding Order for Taxes (EWOT).

An EWOT is a wage garnishment that continuously levies 25 percent of a taxpayer's disposable income (from wages) until we release the order or the balance is paid in full. Once an EWOT is in place, our policy is not to release it, except under limited circumstances. In cases of financial hardship, we will modify an EWOT to a lesser percentage, to a flat amount per pay period or when warranted, release the EWOT. We will mail the garnishment modification or release notice to your client’s employer and fax the modification or release upon request.

If you think we issued an EWOT in error, or if your client has filed bankruptcy, call (800) 689-4776 so we can analyze your client's account.

It is always best to pay the full amount of tax due by the original due date of the return to avoid penalties and interest. However, when that is not possible, an IA with us may be a viable option under certain circumstances. Having an IA in place may help your client avoid an EWOT, lien, and/or levy.