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What to do if you
BY JIM WALSH
owe Uncle Sam
From Willie Nelson to Martha Stewart, Wesley
Snipes and countless ordinary working stiffs,
Americans have a long history of not paying their
income taxes. If you fall behind, what can you do
about it, and when should you seek help?
“Contact an attorney and an accountant right
off the bat,” says Jill Darrow of Katten Muchin
Rosenman. “We tell [clients] to immediately file
the back-tax returns, even if they can’t pay the
taxes.” Send a letter along with returns you have
ready, or explain that you’re working on returns
with an accountant and will file them soon.
“You want to show that you’re coming forward,
and that you’re a good guy, before the IRS or the
state finds you,” says Darrow. “The attorney can be
helpful right away … preparing the cover letter and
identifying any criminal exposure, and providing
appropriate advice to mitigate the risks.”
The IRS Fresh Start Initiative offers failure-
to-pay penalty relief to many unemployed and
self-employed taxpayers. It has been expanded to
let more taxpayers use installment agreements to
catch up. And the Offer in Compromise program
settles tax liabilities for eligible struggling
taxpayers for less than the full amount owed.
Amanda Nussbaum, with Proskauer Rose’s
New York office, says, “We help people
understand the tax rules, and we generally advise
our clients who have not complied with their tax
She generally sees four categories of tax
avoiders. “The first is tax protesters: people who
know about their obligation, but choose not to pay
because they think the tax code is unconstitutional.
“Number two is people who don’t understand the
rules, or who aren’t aware of the rules. … Number
three is people who are generally compliers, who
believe they have an obligation to pay, but there are
certain tax issues which they view as minor issues
and would view it as a situation of ‘Why would the
IRS focus on this?’ or they feel entitled to the tax
position they have taken.
“The fourth category of tax avoiders is people
who made an error in judgment in the past and
find themselves in a situation where they don’t
know how to correct it.”
Yvonne R. Cort of Tenenbaum Law in Melville
sees all sorts of people falling behind on their taxes.
“People could be ill, they could have bill
problems; they put it off and think everything’s
going to be OK come April, and it’s not.
“People may be self-employed and may
not realize they have to put money aside for
estimates. The money comes in and they spend it,
and they don’t even realize that they’re going to
owe this amount of money come April.”
The ramifications for not paying taxes can be
harsh—including fines and garnishment of wages
or seizure of assets to collect the money.
But Cort says, “A lot of months go past
between when [the IRS] first tells you you
owe money and when they start taking active
collection. ... They do give you an opportunity to
come forward and say, ‘Wait a minute, don’t do
that; let’s try and figure something out.’
When you fall behind on state taxes, she says,
“the law only permits New York state to take 10
percent of the gross wages, whereas the IRS will
leave you just a little bit and take the rest.”
It’s every taxpayer’s nightmare come true.
“A lot of what I do is getting people back on
track,” Cort says. “I give very careful instructions,
because they have to stay current or the whole
settlement falls apart and they’re back at the
beginning in a worse position, because now the
IRS thinks you haven’t shown good faith.
“Set up an installment program or other
resolution,” she says. “Otherwise it just
perpetuates and it’s billable from year to year,
and you never get caught up.”