Too many taxpayers are in repayment plans they cannot afford, and that’s leading to some harsh financial consequences, according to a taxpayer advocate inside the Internal Revenue Service.
National Taxpayer Advocate Nina Olson shined a light on installment plans and the perils that taxpayers face if the costs are too steep at a New York City Bar Association panel in New York City on Tuesday.
When taxpayers cannot afford to pay their full tax bill at once, the IRS allows them to pay off the sum in installment plans that are based on their living expenses.
Taxpayers, rather than the IRS, are the ones who initiate and set up the installment plans. But if that installment plan pushes those taxpayers into “economic hardship” the IRS must cease the installment plans under the law.
“Many anxious or intimidated taxpayers seeking to resolve their liabilities as quickly as possible may be unaware the IRS is required to halt collection action if they are in economic hardship and thus agree to make tax payments they cannot afford,” Olson’s office wrote in a recent blog post on the issue.
Some 40% of taxpayers who were signed up for a certain type of installment repayment plans in fiscal year 2018 had earnings smaller than the living expenses estimated by the IRS, Olson said Tuesday. In other words, Olson said, “they could not afford to pay the debts they were paying.”
Furthermore, 39% of those individuals ended up defaulting on their plans — “so we set them up to fail,” she said.
Olson, who’s retiring in July, said the IRS should have a better system of estimating living expenses and keeping track of taxpayers’ ability to keep up with the IRS installment plans. The agency has access to vast amounts of data about income and family structure that could help design more effective repayment plans, but it rarely taps into that information, Olson said.
The IRS told MarketWatch it has trained staff and established “safeguards over the years to ensure that taxpayers who are experiencing economic hardship are appropriately addressed during the collection process” and are given “opportunities to challenge the appropriateness of a proposed collection action.”
In its statement, the agency noted it “cannot reliably determine economic hardship based solely on information available in IRS and third-party databases, which is often incomplete.”
People typically have to submit financial information supporting documents for the IRS to get a clear and accurate picture of a taxpayer’s repayment abilities, the statement added. “Each case is analyzed individually under guidelines that are applied uniformly. … Any attempt to proactively identify taxpayers likely to be in economic hardship based on an incomplete set of facts would lead to flawed results.”
An estimated 7.9 million people owed money on their taxes this season, even though they received a refund before Trump’s tax reform took effect, according to one study.
The number of people in repayment plans could be going up, if one government estimate is right. Last year, the Government Accountability Office said around 30 million Americans, or 20% of taxpayers, would owe taxes because they failed to change their paycheck withholding amounts after the new tax law took effect in 2018. That was an increase from 18% of taxpayers who would have owed money under the previous tax law.
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