Pennsylvania State Tax Forms | Pa Inheritance Tax Forms | Form Pa 40
Overview of Pennsylvania Back Taxes Consequences and Resolution Options
The Pennsylvania Department of Revenue is liable for the collection of the PA state’s tax which also includes the income tax. When the income tax payments are not made timely, it is considered a wrongful act. The Department of Revenue sends a notice to the taxpayer about the dues and makes demand for the payment through the notice.
Appeal for Tax Assessment and process of collection
The taxpayer is allowed 90 days to contest his tax assessment by filing for an appeal with the Board of Appeal of DOR. It is important to keep in mind that time is very important here. The Board of Appeals has no legal authorization for extending the 90 days in which the appeal has to be made. When no appeal is made or in case, the appeal fails, the DOR initiates taking actions for tax collection.
The DOR might also pursue wage garnishment against the taxpayer and the taxpayers need to attempt resolving outstanding liabilities.
Options for PA Individual Tax Resolutions options
Taxpayers owing delinquent income taxes to the State of Pennsylvania have four different options available for them to obtain a good resolution. They are
- Installment Agreement
- Offer In Compromise
- PA forgiveness program
- Penalty Abatement
- Innocent Spouse Relief
- Levy release
An instalment agreement or Deferred Payment plan is a kind of payment arrangement where the taxpayer can make tax payments every month until the taxpayer has made all payments of tax liabilities. Those taxpayers with limited scenarios can request an offer in compromise and some can make a written request for penalty abatement. In simple words, he can ask the DOR to waive a part of or all of their tax penalties. Another option is the taxpayer can request Innocent Spouse Relief in some situations where their due tax liabilities are attributed to their spouse.
In the state of Pennsylvania, there is no statute of limitation for collecting unpaid taxes. Thus, the DOR might get engaged in collection actions for due taxes for a period of unlimited duration.
Tax resolution options
The Pennsylvania DOR offers a tax payment plan as a Deferred payment plan. It does not have any form for filling and establishing these options, rather, the taxpayers are instructed to call the DOR collection unit. Otherwise, they can visit the district office in person for the establishment of DPP. Taxpayers can get the list of District Office locations. According to DOR, they will all attempt to remain flexible in regards to DPP. The DOR makes sure that a taxpayer’s DPP makes financial sense. DPP will never put any kind of financial burden on the taxpayer. The DOR will also avoid the payment agreements that makes the taxpayer to incur unrequired and outlandish interest charge.
But before entering DPP, the taxpayer has to file their tax returns. In general, many kinds of payment plans are available through DOR such as one that is less than 12 months and for less than owing amount $50,000. When a taxpayer is not able to meet those terms financially, then they are required to offer financial information. The DOR requests trying a negotiation of a low monthly payment figure. Regrettably, the DOR does not offer much guidance on how to make those determinations.
Pennsylvania allows offer of compromise in some situations. These request should be done through the Board of Appeals of DOR within 90 days. The two situations where an OIC should be considered are when there is a doubt as to whether the taxpayer owes tax and when there are issues for promoting efficient tax administration involved.
Taxpayer Forgiveness
Pennsylvania has programs where the taxpayer with a low income can decrease or remove their tax liabilities through tax forgiveness credits when they file any return. It is always an option for preparation and not a resolution as per CPA. For option tax forgiveness, a taxpayer needs to complete the tax forgiveness schedule on the form PA-40. The taxpayer income along with the number of dependents is eligible for claiming the determines of the tax forgiveness level.
The DOR offers some general eligibility needs
Tax forgiveness eligibility
For a taxpayer to be eligible for the tax forgiveness option, they have to find out whether they are eligible or not through completion of PA 40 schedule SP. Taxpayers can also look for extra instructions on tax forgiveness.
Eligibility income is not the same as taxable income. The taxpayer has to include income reported on the form PA 40 along with the following non-taxable income:
- Interest, dividends and gains that are different from Pennsylvania tax
- Alimonies
- Insurance payments or value of inheritance. This amount is the total amount from life and other insurance policies. It also includes inherited cash or the property value received and any amount reported on the Federal Form 1099 –R along with the distribution code”4” reported in BOX 7 of the form.
- Gifts, prizes and awards obtained in recognition of civic and social achievements or any non-cash winnings from the PA lottery
- Non-residential income
- Military payment received which the taxpayer does not have to report as income on the form PA 40. It does not include hazardous duty or any combating payment
- The non-taxable profits on the sale of any residence
- Values of scholarship, stipends or any fellowship that are not taxable
- Any other cash payments obtained from people who are living outside the household of the taxpayer
- Some of the typical items include personal support from the former spouse, gifts obtained from grown children, non-taxable payments to the cafeteria plan of the employer and amounts received from a foster parent.
Some items not included as eligibility income are social security, pension payments, child support and unemployment.
Determine the percentage of tax forgiveness
After the taxpayer has found out their eligible income, they can make use of the accompanying eligibility income tables from the PA schedule for determination of the tax percentage forgiveness permitted.
If the taxpayer is not married, is separated or is filing on behalf of the deceased claimant, they can use Table 1 and in case, they are married, they can use Table 2. The table contains the number of dependent children on the left-hand side. The taxpayer needs to find the row matching the number of dependent children they are having and then the column in that row that matches the eligibility income. When found out, the percentage of the tax forgiveness will be present at the bottom of the column.
Taxpayers can only make claims for minor dependents or adult children who are dependents on their federal income tax returns. For PA state tax forgiveness purposes, the eligible children are
- Biological children
- Stepchildren
- Adopted children
- Grandchildren of grandparents
- Foster children of foster parents
But the uncles and aunts or any unrelated persons might not claim a child as dependent irrespective of whether they claim them on federal income tax returns. Taxpayers can claim adult children for tax forgiveness reasons if in case, they meet the qualification and claim them as dependents on 2008 federal income tax returns.
In general, a taxpayer does not qualify for tax forgiveness if he or she makes claims as a dependent on somebody else’s federal income tax return. One exception is if the person makes claims that the taxpayer is also eligible for Tax forgiveness. For example, a student with a part-time job gets claimed by his or her parents on their federal income tax return. In such a case, the student might claim tax forgiveness with his or her state tax return until the parents qualify.
Process of filing and considerations
The taxpayer should watch the complete PA schedule SP to their tax return to obtain the tax forgiveness credits. Contrasting the filing considerations for conventional offers in compromise, this program is mainly objective. The taxpayer needs to meet the income eligibility needs for qualifying. No other factors are taken into consideration like the capability of DOR to collect the taxes depending on the financial condition of the taxpayer.
Pennsylvania provides relief from Joint Liabilities. This relief is there for the taxpayers who are not liable for their spouse’s owed taxes under some circumstances. The advocate of the taxpayer’s rights is responsible for determining when to provide innocent spouse relief. Pennsylvania provides three kinds of innocent spouse relief:
- Understatement of tax
- Liability separation
- Income allocation
Understatement of Tax
An Understatement of Tax is the difference between the total tax amount that the taxpayer should have reported on the tax returns and the tax amount the taxpayer reported. A taxpayer might get relieved from the joint liabilities for an understatement of tax, which includes interest and penalties when they meet all the below written conditions:
- The taxpayer filing of joint return has an understatement of tax because of the erroneous item of the spouse.
- The taxpayer established that at the time when they signed the joint return they did not have any knowledge and did not have any reason for knowing that there was understatement of tax.
- By considering all facts and situations, it is unfair to hold taxpayers liable for the understatement of tax.
The DOR states that it takes into consideration all situations and facts of every case for determining whether it is fair to hold the taxpayer jointly liable for the understatement. But there are two main factors that they consider specifically:
- Did the taxpayer obtain any substantial benefit to
- Was the taxpayer divorced from or deserted by the spouse
Liability separation
A taxpayer might be eligible for liability separation relief when they meet any of the following conditions:
- The taxpayer is divorced, legally separated or widowed from the individual with whom they have filed a joint return
- The person with whom they had filed a joint return has not been a member of the household at any time in 12 months past the date of filing for innocent spouse relief.
The DOR states that when the taxpayer is eligible for the Separation of Liability Relief, they will be allocated erroneous items between the taxpayer and their spouse or the former spouse by finding out how the erroneous items would have been reported in case the taxpayer was to have filed a separate return.
Except the former spouse asks for Separation of Liability, they will be considered liable for the full understatement of tax. The burden of proof lies with the taxpayer looking for tax relief in the establishment of the basis for the separation of liabilities.
Allocation of Income
A taxpayer might qualify for relief by income allocation in case they are jointly responsible for underpayment of tax and this underpayment of tax is not attributed to income that would have been on their separate return when filed. Moreover, a taxpayer might qualify for relief by income allocation when they fail to qualify for relief from joint liabilities through Understatement of Tax or Separation of Liability Relief. When a taxpayer applies for tax relief through understatement of tax or separation of liability, the DOR will consider whether relief by income allocation is suitable or not.
Eligibility for relief by income allocation
To become eligible for tax relief by Income Allocation, the following things must be applied:
- The taxpayer cannot apply for relief through understatement of tax or separation of liabilities, or they are combinely responsible for underpayment of tax that is not attributed to income that might have been reported when they file for a separate return.
- Their spouse and their taxpayer have not transferred assets to one another as a part of any fraudulent scheme
- The spouse has not transferred assets to the taxpayer for the avoidance of tax or payment of tax
- The taxpayer has filled out all needed personal income tax returns and does not have any outstanding personal income tax liabilities for a tax year or years other than the year or years for which they are looking for relief.
- The taxpayer was not a member of the same household as the spouse with whom they have made filing for joint return at any time in 12 months after the date they filed for innocent spouse relief.
- Depending on all facts and circumstances, it is unfair to consider the taxpayer responsible for the understatement or underpayment of tax.
- Taxpayers have not filed their tax returns with the intent of committing fraud.
Furthermore, the DOR states that they will take into consideration all the situations and facts for determining whether it is not fair to hold the taxpayer liable for the understatement or underpayment of tax. Moreover, they also state that they will take into consideration both positive and negative factors and measure them perfectly.
Filing for innocent spouse relief
The taxpayer should file an Innocent spouse relief and should ensure to fill out forms in the packet that are appropriate for their situation. Then the taxpayer or their representative must mail the complete packet to
PA Department of Revenue
Office of Taxpayers’ Rights Advocate,
Lobby Strawberry Square
Harrisburg, PA 17128.
Appeal rights for liability separation and relief for understatement
Taxpayers should appeal considerations of relief for understatement of tax and separation of liabilities. Taxpayers should file a petition with the Board of Finance and Revenue within 90 days of the mailing date of notice of the final determination. Determination of relief through income allocation can’t be appealed. In addition, if the taxpayer does not receive a determination from the taxpayer’s rights advocate six months after filing for relief, they can file a petition with the board asking it to review the request.
Taking into consideration the taxes due, there are two kinds of penalties that any taxpayer must be mindful of.
- First is failing to file for a penalty. The DOR assess the failure for filing penalty whenever the taxpayer fails to submit his or her tax return by the required date which also includes extensions. Failing to file for a penalty is % of the tax due of the month when the return is late. The maximum penalty for late filing is 25% of the amount due.
- The second is failing to make payment of the penalty and it is 5% of the due amount. In addition, the interest accrues for every month that a wrong tax goes unpaid at a rate of 8%.
- These penalties have a chance of becoming steep. Thus, even when a taxpayer is not able to make payment of the due tax they must strive to file their income tax returns on time to avoid or decrease the effect of those penalties and interest assessments.
Pennsylvania facilitates the taxpayers for appealing penalties and assessments of interest by filing for petition to the Board of Appeals. Taxpayers have to complete a petition form for submission of penalty appeal requests with the Board of Appeal. The taxpayer must file the petition online on the website of the Board. However, the petition form offers various options for mailing or faxing the petition.
Other options that a taxpayer can consider
Challenging the assessment or request for compromise
When a taxpayer has a planned assessment for extra income tax owed because of a state audit, they can appeal for the said assessment to the Board of Appeals. The taxpayer can file their petition online on the board website.
In this stage, taxpayers should also file for a petition looking for tax compromise. According to the Board, they will grant tax compromises in scenarios where the liability is in doubt and it is promoting efficient tax administration. In case, the taxpayer does not solve the issues with the Board of Appeal, the taxpayer can appeal for their decision to the Board of Finance and Revenue.
Bankruptcy
Taxpayers might take into consideration the option of bankruptcy when they have substantial personal liability along with the taxes they owe. In many situations, a taxpayer can get relief from taxes through bankruptcy. But there are several rules and criteria applied here. Taxpayers must look for advice of any experienced tax and bankruptcy attorney when they want to pursue these option.
Tax Amnesty program in the State of Pennsylvania
Pennsylvania has had several amnesty programs and on June 19, 2017, these programs ended. Any delinquent taxpayer must use such kind of tax program if in case the State make use of it in coming days.
This program applied for all owed taxes to the state that are administered by the DOR. For taxpayers to participate in it, they need to file online Amnesty Returns, file for delinquent tax returns and make all required payments within the Amnesty period. When the taxpayer completes those needs, then the DOR will waive all penalties, lien and collection fees and ½ of the interest due.
Right to Appeal
As discussed here in this blog, the DOR has a Board of Appeal that was proven as a unit within the DOR for being responsible for the review of the appeals made by the taxpayers. However, in maximum cases, taxpayer appeals are limited to on-time appeals of proposed assessments and penalty and interest appeals.
In an alternative way, there are certain practical tips that the taxpayer or their representative must follow to reach a good resolution.
Firstly, never be afraid to escalate contentious problems to any supervisor within the DOR. Most of the time a fresh set of eyes, authority and experiences of any supervisor can assist in resolving the tax problems amicably.
Secondly, when you think that your case manager is not as per the terms of Pennsylvania law or any discrimination against you, file a request for help with the Taxpayers Rights Advocate. The Office of Taxpayers Rights Advocate can assist the taxpayers in solving the issues such as:
- Any issues or any kind of action by the Department of Revenue that has not been solved by following normal and established processes.
- Making a delay of more than 180 days
- The DOR failing to offer a response or any kind of resolution by the promised date
- DOR actions that can cause significant hardship
For any kind of information, one can visit the Taxpayers Right Advocate page of the Department of Revenue Website.
PA Tax Lien releases
The Department of Revenue will not make release of tax lien after receiving the confirmation that the taxpayer has made payment of their tax liabilities in complete amount. The DOR states that these processes will take about 45 days.