Many Americans have spent years saving money in a retirement account such as a 401(k) or IRA while planning to use this money to support themselves later in life. Retirement accounts can offer certain tax benefits, but they also provide restrictions on when these funds can be withdrawn. In times of economic hardship, account holders may wonder about their options for using these funds. Fortunately, the Coronavirus Aid, Relief, and Economic Security (CARES) Act has given those who have been affected by the COVID-19 crisis the ability to use funds in a retirement account while avoiding some of the penalties for early withdrawal.

Withdrawals and Loans from Retirement Accounts Under the CARES Act

Typically, account holders will face a 10 percent penalty (on top of any taxes that would normally apply) if they withdraw funds from a retirement account before reaching the age of 59 ½. The CARES Act has waived this tax for withdrawals of up to $100,000 made before December 31, 2020, by people who qualify for relief due to being impacted by the coronavirus pandemic. Qualifying accounts and retirement plans include 401(k)s, IRAs, 403(b)s, and profit-sharing plans.

U.S. taxpayers are required to report all of the income they earn and pay applicable taxes, including income earned from foreign investments and offshore accounts. The requirements related to these types of accounts can often be complex. Taxpayers who are not compliant may be audited, and they could face penalties that include civil fines or criminal prosecution. 

Foreign tax compliance has become more difficult since the end of the Offshore Voluntary Disclosure Program (OVDP). This program, which was discontinued in September 2018, allowed taxpayers to avoid penalties by disclosing their foreign assets and paying taxes due. Since the end of the OVDP, some taxpayers who had previously been compliant may be facing additional scrutiny and potential penalties from the IRS. The IRS’s Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP) programs are still available for taxpayers able to make sworn nonwillfulness statements and file the required forms and make the required payment.

For the past few months, the coronavirus pandemic has affected states across the country. Some states with larger populations, such as California and New York, have experienced a much larger infected population and have consequently placed restrictions on businesses and individuals in an effort to slow the spread of the virus. Nonessential businesses were ordered to shut down brick-and-mortar operations and work from home, if possible. Even though not all businesses were affected equally by the pandemic, many businesses are still struggling to stay afloat during this time. In response to the struggles that many businesses are feeling, California Governor Gavin Newsom issued an executive order allowing businesses affected by COVID-19 to request an extension to file payroll reports and taxes to the state.

How Can I Receive an Extension for Filing?

Payroll taxes consist of four separate categories: unemployment insurance (UI), employment training tax (ETT), state disability insurance (SDI), and personal income tax (PIT). Normally, these taxes are filed and paid by an employer on a regular basis. SDI and PIT due dates depend on the employer’s federal deposit schedule and the amount of PIT that has been withheld. UI and ETT payments are due quarterly, or every three months.

Usually, an employer would face penalties for late filing, and the employer would be required to pay a penalty plus interest on late payments. However during a state of emergency, employers can request that the deadline for their payroll taxes be extended up to 60 days. California Governor Newsom stated in an executive order that businesses that have been directly affected by the COVID-19 pandemic can request this extension.

COVID-19 has completely transformed most people’s day-to-day lives. You may be working from home or unable to work until the quarantine period is over. You may have been laid off from your job and now must survive with no income. Even if you are able to continue working, you may be left without childcare or other necessary services. These issues can quickly create serious financial hardship. You may struggle to pay your bills or even to put food on the table. During hard times like these, paying tax debts may simply not be possible. Fortunately, an “offer in compromise” offers many struggling taxpayers the opportunity to settle their tax liability for a reduced amount.

Addressing Outstanding Tax Debt Through an Offer in Compromise

Having an unpaid tax liability can be a very distressing burden to bear. If you currently owe the IRS money, you may be worried that you will be visited by an IRS agent or even face criminal charges for failure to pay. Fortunately, the IRS is much more interested in collecting unpaid taxes than punishing taxpayers who have an unfulfilled tax obligation. The agency offers several options that can help taxpayers who are experiencing financial struggles to fulfill their tax obligations and become compliant with the law.

An offer in compromise allows a taxpayer who cannot afford to pay his or her full tax debt to settle the debt for less than the original amount. If paying your full tax debt would create a financial hardship, an offer in compromise may be right for you. When deciding whether or not to grant an offer in compromise to a taxpayer, the IRS will consider the taxpayer’s income, assets, expenses, and overall ability to pay. In order to qualify for this program, you must file all of your required tax returns, and you cannot be in an open bankruptcy proceeding. The IRS typically charges a fee when submitting an OIC application; however, this fee may be waived if the applicant’s adjusted gross income or household’s gross monthly income is below 250 percent of the poverty guidelines issued by the Department of Health and Human Services. The IRS also typically requires a 20% “deposit” of the offered amount be made at the time of offer submission. Upon offer acceptance, this “deposit” then becomes part of the offered amount. HOWEVER, very importantly, if the offer is rejected, the deposited amount is NOT returned to the taxpayer and is logged as a payment toward the unpaid tax liability. John D. Teter will work extensively with you to ensure you are making a “good” (acceptable to the IRS) offer to maximize the likelihood of offer acceptance and get you back on the road of tax compliance with a fresh start and old tax debt resolved.

The coronavirus has dramatically impacted people’s lives in the United States and across the globe. Many individuals have been temporarily or even permanently laid off from work or have been forced to reduce their work hours significantly. The financial consequences of the virus itself and the attempts to curb the spread of the virus have left many families wondering how they will pay their bills. In a move to provide financial relief to struggling taxpayers in the United States, the Internal Revenue Service (IRS) has implemented a new program called the “People First Initiative.” The program provides relief for individuals and businesses through extended filing deadlines, postponed payments, and limited enforcement actions. The deadline for filing federal tax returns has been extended to July 15 and many states, including California, are also offering extensions for state tax returns.

Existing Installment Plans and Offers in Compromise

The IRS offers several options for taxpayers who cannot fulfill their tax obligations. One of these options is to pay their tax bill in installments over time through a payment plan called an installment agreement. Another option that is available in some situations is an “offer in compromise” (OIC). An OIC is an agreement between the IRS and a taxpayer with a tax debt that settles the debt for less than the original amount owed. Individuals who are paying off tax debt through an installment agreement may postpone payments until July 15 of this year. The IRS has also announced that it will not default on installment agreements during this time period. However, interest on the unpaid amount will continue to accumulate.

If you have a pending application for an offer in compromise, the IRS is increasing the amount of time you have to provide any requested documentation or information. The agency has also promised that it will not close any pending OIC requests before July 15 unless the taxpayer agrees to close the request. Those currently making OIC payments have the option to suspend payments until July 15, but interest will continue to accumulate. Furthermore, the IRS has stated that it will not default on OICs for individuals who are delinquent on their 2018 tax return during the relief period.