State Income Tax Returns? Why You Might Want to File the State Before the IRS.
Updated: Jun 22, 2021
By: Brian Barto, EA
We help our clients in Winchester, VA resolve IRS and state tax debt. Do you have unfiled tax returns? Chances are if you have unfiled federal tax returns, you also have unfiled state tax returns. There are times when filing the state returns BEFORE filing the federal returns makes sense from a tax resolution standpoint.
When calculating a taxpayer’s ability to pay, the IRS will use the taxpayer’s gross income from all sources and then allow certain expenses. This is known as the “Future Income Calculation”. This is not based on taxable income, but on cash-flow. The IRS is attempting to calculate the taxpayer’s free monthly cash to pay down their tax debt. After taking into account ALL gross income coming in, the IRS has a list of allowable expenses. One of these expenses is delinquent state taxes. Generally, the allowable amount is only the percentage of state tax debt vs federal tax debt. The “allowable percentage of future income” calculation is designed to take the remaining allowable income and allocate it between the IRS and state & local tax debt based on the percentage each is owed of the total tax debts of the taxpayer.
When working with unfiled tax returns, the first thing we must determine is, how much will be owed to each? Once we know that, we can begin to create a tax resolution plan. So, we would prepare the tax returns to determine the amounts owed…but NOT file them yet! Why?
If you have an existing installment agreement for delinquent state or local tax debts, which was established prior to the earliest IRS date of assessment, we may be able to include 100% of the state tax payment as an allowable expense for your federal Offer in Compromise! For this reason, it may make sense to file all of the state returns and establish a payment plan with the state for the amount owed. Once the payment plan is in place, then file the federal returns. There are a lot of small strategies such as this that we may use to help you to reduce your payments to the IRS.
At Tax Debt Resolution Services of Winchester VA, we help you eliminate your IRS issues and the stress the IRS has created in your life and help you get back to doing what you do best! We help our clients in Winchester, VA to resolve their tax debts! If you need assistance please feel free to contact me at 540-662-4432 or firstname.lastname@example.org.
24 Weems Lane, Winchester, VA 22601.