Written By: Gerald Zeigler, AFC®
Clients often ask financial counselors and coaches about taxes and tax situations. Here are some resources and some information you can provide regarding Federal taxes when you aren’t a tax expert.
IRS.gov is one of the better government websites. It is full of resources for taxpayers. Here are some of them:
- Where’s My Refund. The status of refunds can be tracked and there is even an app. There are limitations and an amendment status can be checked at Where’s My Amended Return?
- The Interactive Tax Assistant, a tool for tax questions. It covers some common questions and sends the taxpayer through a series of queries to answer their own question.
- Tax records and tax transcripts. Tax transcripts can be ordered online or via mail. There are several types, so often when I send someone to retrieve them I say just get all of them for the year in question. They do not look like a tax return. We often use the Wage and Income tax transcript to amend a tax return or even file the original tax return. It only shows information that the taxpayer reported to the federal government and that is applicable to the Federal return. Some information needed for a state return is typically not present. If someone wants a copy of an actual tax return they need to mail in Form 4506 and for that there is a fee.
- Tax Account. It may seem weird, but relatively often a client will tell me they don’t know how much they owe, that information and other information can be found in their tax account.
IRS.gov also has publications, forms, and instructions that taxpayers and tax professionals use to prepare tax returns. You can even order paper copies. I encourage taxpayers to see if they can get the information and guidance they need there before calling 1-800-829-1040.
Struggling to Pay
Just like any other bill or debt, it is best not to ignore a situation where the IRS is expecting payment. If a taxpayer’s tax return indicates they owe the IRS and they don’t have the money, they should file the return still. The penalty for failure to file can be 10 times higher than the penalty for not paying. Getting an extension (barring an exception like we saw in 2020 due to COVID) does not mean a taxpayer doesn’t have to pay on time. A taxpayer can and should pay what they can when they file. And even better, a taxpayer can request an installment plan when they file their tax return, even suggesting the payment they would like to make. The IRS will let them know what their payment plan is by letter. A taxpayer can also request a payment plan online or by mail. Most payment plans do have a fee.
The IRS wants taxpayers to fulfill their tax obligations and pay any penalties and interest they also owe. But they know there are situations that taxpayers sometimes owe due to no fault of their own and that sometimes life circumstances make it difficult to pay. So, they offer different ways to ease the burden of payment and in some cases relief from debt, penalties, and interest. Here are some forms of relief:
Unfortunately, it is relatively common for one spouse to have debt that the IRS will collect on when they file their tax return. Some of these can be quite substantial and include items like child support, student loans, prior taxes, and other government debt. Military financial counselors may be familiar with the Military Star Card. The IRS can consider debt on the Star card to be government debt and collectible. Often the other spouse’s debt comes as a surprise and it can cause a lot of frustration. After it first comes up, many couples decide to file Married Filing Separately. In that case, the injured spouse – the one that doesn’t owe the debt – can still get a refund. However, this can increase filing costs when filing two tax returns rather than one. And worse, filing separately reduces or eliminates some credits and deductions.
So the IRS provides another option. It is Form 8379 Injured Spouse Allocation. The taxpayer can file this form with a tax return, with an amendment, or separately after filing the tax return. We use Form 8379 to allocate a portion of the refund to the injured spouse. This way the injured spouse will still receive a refund, if entitled to one. It is possible that the IRS will determine a different number than the taxpayer or their tax professional determines.
The disadvantage of the injured spouse form is that it adds to the processing time. When filed with the joint tax return it can mean it will take 11 to 14 weeks to process the tax return. A Form 8379 filed after a joint tax return is processed can take about 8 weeks to process. Realize that it also slows down the pay-off of the debt as well. Form 8379 has to be filed each year when filing a joint return when one spouse has debt that is subject to collections from the refund.
Innocent Spouse Relief
The Form 8857, Request for Innocent Spouse Relief, is for when a spouse believes that only the other spouse or ex-spouse should be held responsible for some tax debt and the IRS is holding them both responsible. Most often this involves cases of abuse and when one spouse hides information from the other spouse. While this, and really any forms, filings, and communications can be done without tax professionals, taxpayers should consider consulting a professional before filing this form.
Other Forms of Relief
Again, while all of these can be pursued by individual taxpayers, it can be very beneficial to have professional assistance for getting different forms of relief. Understanding which method or path applies and which one is best for a situation can be difficult. Relief from penalty and interest is more common than from relief from taxes. In some cases, improperly filing a form can result in a penalty. But it is important that financial counselors and coaches know they exist so they can share that with clients when applicable to their situation.
- Separation of Liability Relief and Equitable Relief. These forms of relief also apply to spouses and ex-spouses. Sometimes in cases where innocent spouse relief doesn’t apply, one of these will. Discussion on these can be found in Publication 971.
- Abatement. Form 843 is used for a Claim for Refund and Request for Abatement. There are various acceptable reasons to get an abatement for interest or penalties. One example is when they were incurred due to IRS errors.
- First Time Abatement (FTA). This one is often viewed as a “free pass” or “get out of jail free” card (not literally). If qualified, it can only be used once, so using it for a smaller amounts may not be wise.
There are other paths for relief and again determining the best path can often be complicated. I’ve included this discussion so that you are aware that possibilities exist and so you can share that with clients, NOT so you can navigate the paths with or for your client. Also, ensure you don’t create false expectations when discussing these options with clients. Relief options may be helpful, they may not.
Taxpayer Advocate Service
The IRS wants taxpayers to be able to resolve issues and to pay what they owe to the best of the taxpayers’ abilities. Preferably they can do that on their own or with the assistance of their tax professional. But sometimes a taxpayer gets mired in the bureaucracy and after making a determined effort to “fix” an issue just isn’t getting anywhere. The Taxpayer Advocate Service is an organization within the IRS whose purpose is to ensure taxpayers are treated fairly. This is a resource for taxpayers who haven’t been able to resolve an issue any other way.
As a Financial Counselor or Coach you may not be a tax expert. But you can help your client close their knowledge gap and help them determine a path forward. And that is what we are all about, helping our clients move forward in bettering their finances.