Taxing Situations for New Yorkers
What to do if you owe Uncle Sam back taxes
on April 6, 2017
Updated on January 27, 2023
From Willie Nelson to Martha Stewart, Wesley Snipes, and countless ordinary working stiffs, Americans have a long history of not paying their personal 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 the income tax returns you have ready, or if none are complete, explain that you’re working on your returns with an accountant and will file them as soon as they’re done.
“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, from 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 tax relief to many taxpayers who are unemployed, or self-employed but suffered economic losses. The program has also been expanded to allow more taxpayers to use installment agreements to catch up on back taxes. In addition, the Offer in Compromise (OIC) program settles tax liabilities for eligible struggling taxpayers for less than the full amount owed.
Amanda Nussbaum, with Proskauer’s New York City office, says, “We help people understand the tax rules, and we generally advise our clients who have not complied with their tax obligations to file an amended return.”
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.”
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. … They just fall further and further behind.”
The ramifications for not paying taxes can be harsh—including fines for failure to file or to pay taxes; and garnishment of wages or seizure of assets to collect the money.
But Cort says the IRS gives taxpayers time to avoid active collection.
“There’s a lot of months that go past between when they first tell you you owe money and when they start taking active collection, meaning taking money out of your bank account or garnishing your wages,” she says. “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.’
“Levying your wages is way down the line; they only do that when someone has ignored everything else and this is their way of getting you to sit up and take notice. Because when the IRS takes your wages, they can take a large part.
“New York State also has a very active department of taxation and finance, and they are very aggressive with their collections, but 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.”
If you want more information on tax laws, see our tax overview.