An IRS tax official has told you to be up to date on your federal tax filing and payment. So what does it mean to be up to date with estimated tax payments from the IRS? How important is this to getting a tax ruling from the IRS? Read on for the answers to these questions and other related concerns.

Making Estimated Tax Payments: What Does It Mean to Stay Current?

You are trying to negotiate with the IRS to end last year’s tax problems, however the current year is still active. As the current year draws to a close, you will incur a new liability for that year. By April 15 of the following year, the US tax authorities expect you to pay what is owed regardless of whether you have paid tax owed from previous years or not, as they want you to avoid accumulating new tax debts. In order for the IRS to allow you to pay your taxes for your previous years, you must make sure that your current year’s taxes are paid.

Why You Should Follow Estimated Tax Rules

If you are not up to date with your tax payments, the IRS or local tax authorities will not consider any of your proposed payment plans (although there are some exceptions that apply). A question that is often asked is: “Why can’t these tax authorities transfer my tax debt from the current year to the monthly installments I pay to eventually pay off my debt?”

This is one of the most common misconceptions about back taxes. The IRS does not operate like a credit card company that allows you to make a partial payment each month while adding new liabilities to your balance. No, the federal tax system is unique. A new automatically incurred tax liability will violate any previous agreement you have had with the IRS. The IRS will now consider you a “bad” taxpayer who repeatedly falls behind on payments, making your situation worse. (Side note: You must be current if you want the Notice of Federal Tax Lien withdrawn.)

The above principle also applies to an Offer in Compromise (OIC) accepted by the IRS. Once an OIC is accepted, the taxpayer cannot incur new tax debt for the next five years or until the offer amount is paid in full. If you incur new tax debt within that time period, the IRS will default on your offer in compromise and will restore the full amount of your original liability with interest.

Additionally, to negotiate installment agreements, you must also be up to date with estimated tax payments and federal tax deposits. Taxpayers often fail to negotiate a payment agreement with the IRS because they do not submit the proper documentation and their estimated tax payments on Collection Information Statements.

In general, the requirement to “stay current” is extremely difficult for most people and we fully agree on this. For salaried employees (W-2), estimated tax may be easier to manage since only a deposit is required. But for companies with unpaid payroll taxes, it is much more difficult. Unfortunately, whether it’s simple or difficult to administer, the fact is, you must be tax compliant to get a ruling from the IRS.

How to avoid estimated tax penalties and ensure the best tax resolution

If you are an employee, make sure enough tax is deducted from your base salary so that you can avoid paying estimated taxes. If you are an employer, follow the deposit schedule diligently and file Form 941 quarterly and Form 940 annually. If you are self-employed, calculate and make estimated tax payments using Form 1040-ES. This form contains four pay stubs that you can use to make your quarterly payments for the current year. Complete the appropriate voucher, attach your check, and mail it to the IRS every quarter to stay current.