PA State Back Tax Resolution Options
Introduction: An Overview
The Pennsylvania Department of Revenue (the “DOR”) is in charge of collecting the State’s taxes, including the income tax. Once all appeal rights have been exhausted on the tax liability, the DOR will mail a collection notice to the taxpayer. Shortly after that, if the taxpayer has not responded to the notice, the DOR will attempt to call the taxpayer.
If the liability remains outstanding after 90 days from the date on the notice, the DOR will begin collection actions. Generally, the DOR will file a tax lien against the taxpayer in the amount of the delinquent tax due, including penalties and interest. Further, the DOR may pursue a wage garnishment against the taxpayer. It is essential that taxpayers with taxes owed attempt to resolve their outstanding liabilities.
Various PA Individual Tax Resolution Options
Taxpayers who owe delinquent income taxes to the State of Pennsylvania have four main options (not exhaustive) available to reach a reasonable resolution. These are:
Penalty Abatement, and
A Deferred Payment Plan (DPP) is a payment arrangement whereby the taxpayer makes monthly tax payments until the taxpayer pays off the tax liability. Taxpayers in certain situations can make a written request for penalty abatement. In other words, ask the DOR to waive part or all of their tax penalties. Taxpayer Forgiveness is a program where eligible taxpayers can reduce some or all of their tax liability depending on their income status and family size. Finally, a taxpayer can request Innocent Spouse Relief in certain situations where past due tax liabilities are attributable to their spouse.
Statute of Limitations
In Pennsylvania, there is no statute of limitations on the collection of unpaid taxes. Therefore, the DOR may engage in collection actions for taxes owed for an unlimited duration.
Deferred Payment Plan (DPP)
The PA DOR refers to tax payment plans as Deferred Payment Plans. The DOR does not have a form that should be filed to establish a DPP. Instead, taxpayers are instructed to call the DOR Collection Unit (717-783-3000). Alternatively, they can visit a district office in person to establish a DPP. Taxpayers can find a list of District office locations here.
The DOR states that they will make every attempt to be flexible with the terms of a DPP. The DOR will ensure that a taxpayer’s DPP makes financial sense. In other words, the DPP will not financially burden the taxpayer. The DOR will also avoid payment agreements that cause the taxpayer to incur unnecessary and outlandish interest charges.
Before the taxpayer may enter into a DPP, the taxpayer must file all tax returns. Generally, the DOR will ask the taxpayer for a 20% upfront payment with the remaining balance paid over five months. If the taxpayer is unable to meet these terms financially, then they may need to provide financial information. Generally, the DOR will request it to try to negotiate a lower monthly payment figure. Unfortunately, the DOR does not offer much guidance as to how it makes these determinations.
Pennsylvania does not have a traditional offer-in-compromise program. However, they do have a program where low-income taxpayers can reduce or eliminate their tax liability through tax forgiveness credits when they file their return. For a taxpayer to receive tax forgiveness, they must complete the tax forgiveness schedule on the Form PA-40. The income of the taxpayer and the number of dependents the taxpayer is eligible to claim determines the level of tax forgiveness.
The DOR provides general eligibility requirements.
Eligibility for Tax Forgiveness
For a taxpayer to determine if they are eligible for the tax forgiveness program, they must figure out their eligibility income by completing PA-40 Schedule SP. Taxpayers can find additional instructions on tax forgiveness.
Eligibility Income is different from taxable income. The taxpayer must include income reported on Form PA-40 plus the following non-taxed items:
- Interest, dividends, and gains that were exempt from Pennsylvania tax.
- Insurance payments or the value of an inheritance: This amount includes the total proceeds from life or insurance policies. Also include inherited cash or the value of property received, as well as, any amount reported on federal Form 1099-R with distribution code “4” reported in Box 7 of the form.
- Gifts, awards, and prizes received in recognition of civic and social achievements or non-cash winnings from the PA Lottery.
- Nonresident income.
- Military pay received that that the taxpayer did not have to report as income on Form PA-40. It does not include hazardous duty pay or combat pay.
- The nontaxable gain on the sale of a residence
- The value of a scholarship, stipend, or fellowship that is not taxable
- Other cash payments received from people living outside the taxpayer’s household. Typical items included are personal support from a former spouse, gifts from grown children, nontaxable payments to an employer’s cafeteria plan, amounts received as a foster parent.
Some of the items not included as eligibility income are Social Security, unemployment, pension payments, and child support.
Determining the Percentage of Tax Forgiveness
Once the taxpayer has identified their eligibility income, they use the accompanying eligibility income tables from PA Schedule SP to determine the percentage of tax forgiveness allowed.
If the taxpayer is unmarried, separated, or filing on behalf of a deceased claimant they should use Table 1. If the taxpayer is married (even if filing separately), they should use Table 2. The table will have the number of dependent children on the left-hand side. The taxpayer should find the row that matches the number of dependent children they have and then the column in that row that matches their eligibility income. Once found, the percentage of tax forgiveness will be at the bottom of that column.
Taxpayers may only claim minor dependents or adult children who are claimed as dependents on their federal income tax returns. For PA state tax forgiveness purposes, qualifying children include:
- Biological children
- Step Children
- Adopted Children
- Grandchildren of grandparents
- Foster Children of foster parents
However, uncles and aunts or unrelated persons may not claim a child as a dependent regardless of whether they claim them on federal income tax returns. Taxpayers may claim adult children as dependents for tax forgiveness reasons if they meet the qualifications and claim them as dependents on 2008 federal income tax returns.
Generally, a taxpayer does not qualify for Tax Forgiveness if he or she is claimed as a dependent on someone else’s federal income tax return. One exception is if the person who claims the taxpayer also qualifies for Tax Forgiveness. For instance, say a student with a part-time job gets claimed by his or her parents on their federal income tax return. In this case, the student may claim Tax Forgiveness with his or her state tax return as long as the parents qualify.
Filing Process and Considerations
The taxpayer must attach the completed PA Schedule SP to their tax return to receive the tax forgiveness credits. Unlike filing considerations for a traditional offer-in-compromise, this program is mostly objective. The taxpayer must meet the income eligibility requirements to qualify. No other factors are generally considered such as the ability of the DOR to collect the taxes based on the taxpayer’s financial condition.
Innocent Spouse Relief
Pennsylvania offers Relief from Joint Liability (Innocent Spouse Relief). This relief exists for those taxpayers who otherwise are not responsible for their spouse’s taxes owed under certain circumstances. The Taxpayers’ Rights Advocate has the responsibility of determining when to grant Innocent Spouse Relief. Pennsylvania offers three types of Innocent Spouse Relief:
- Understatement of Tax
- Separation of Liability
- Income Allocation
Understatement of Tax
An understatement of tax is generally the difference between the total amount of tax that the taxpayer should have reported on the return and the amount of tax the taxpayer reported. A taxpayer may be relieved of joint liability for an understatement of tax, including penalties and interest if they meet all the following conditions:
- The taxpayer filed a joint return which has an understatement of tax due to an erroneous item of the spouse
- The taxpayer establishes that at the time they signed the joint return they did not know and had no reason to know that there was an understatement of tax; and
- In consideration of all the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of tax.
The DOR states that it will consider all the facts and circumstances of each case to determine whether it is fair to hold the taxpayer jointly responsible for the understatement. However, there are two factors that they specifically consider:
- Did the taxpayer receive any significant benefit from the to; or
- Was the taxpayer later divorced from or deserted by the spouse.
Separation of Liability
A taxpayer may be eligible for separation of liability relief if they meet one of the following conditions:
- The taxpayer is divorced, widowed, or legally separated from the individual with whom they filed the joint return, or
- The taxpayer and the individual with whom they filed the joint return have not been members of the same household at any time during the 12 months preceding the date of filing for Innocent Spouse Relief.
The DOR states that if a taxpayer qualifies for Separation of Liability Relief, they will generally allocate erroneous items between the taxpayer and their spouse or former spouse by determining how the erroneous items would have been reported if the taxpayer were to have filed a separate return.
Unless the former spouse also seeks Separation of Liability Relief, they will remain liable for the complete understatement of tax. The burden of proof lies with the taxpayer seeking tax relief in establishing the basis for separating the liability.
A taxpayer may qualify for relief by Income Allocation if they are jointly liable for an underpayment of tax and the underpayment of tax is not attributable to income that would have been on their separate return if filed. Furthermore, a taxpayer may qualify for relief by Income Allocation if they failed to qualify for relief from joint liability 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 automatically consider whether relief by Income Allocation is appropriate.
Qualifying for Relief By Income Allocation
To qualify for tax relief by “Income Allocation,” all the following must apply:
- The taxpayer is not eligible for relief via Understatement of Tax or Separation of Liability, or they are jointly liable for an underpayment of tax that is not attributable to income that would have been reported if they had filed a separate return;
- Their spouse and the taxpayer did not transfer assets to one another as a part of a fraudulent scheme;
- The spouse did not transfer assets to the taxpayer for the primary purpose of avoiding tax or the payment of tax;
- The taxpayer has filed all required personal income tax returns and does not have an outstanding personal income tax liability for a tax year or years other than the year or years for which they are seeking relief;
- The taxpayer was not a member of the same household as the spouse with whom they filed the joint return at any time during the 12 months preceding the date they filed for Innocent Spouse Relief; and
- Based on all the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement or underpayment of tax.
- Taxpayers did not file their return with the intent to commit fraud;
Further, the DOR states that they will consider all the facts and circumstances to determine whether it is unfair to hold the taxpayer responsible for the understatement or underpayment of tax. Furthermore, they state that they will consider both positive and negative factors and weigh them appropriately.
Filing for Innocent Spouse Relief
The taxpayer must file an Innocent Spouse Request Election Packet. The taxpayer should be sure to fill out the forms in the packet that apply to their situation. Next, the taxpayer or their representative should mail the completed packet to:
PA Department of Revenue
Office of Taxpayers’ Rights Advocate,
Harrisburg, PA 17128.
Appeal Rights For Separation of Liability and Relief for Understatement
Taxpayers may appeal determinations of relief for understatement of tax and separation of liability. Taxpayers must file a petition with the Board of Finance and Revenue within 90 days of the mailing date of the notice of final determination. Determinations of relief via income allocation cannot be appealed. Additionally, if the taxpayer has not received a determination from the Taxpayers’ Rights Advocate within six months after filing for relief, they may file a petition with the Board asking it to review the request.
Penalties and Interest
Concerning taxes owed, there are two penalties that a taxpayer should be mindful of. The first is the failure to file penalty. The DOR will assess the failure to file penalty when the taxpayer fails to submit his/her tax return by the due date, including extensions. The failure to file penalty is 5% of the tax due for each month (or part of a month) the return is late. The maximum penalty for late filing is 25% of the balance owed.
The second is the failure to pay penalty. The failure to pay penalty is 5% of the tax due.
Additionally, interest accrues for each month (or part of a month) that a delinquent tax goes unpaid at a rate of 6% (March 2019).
As one can see, these penalties can become very steep. Therefore, even if a taxpayer is unable to pay the tax due they should strive to file their income tax return on time (and make a partial payment, if possible) to avoid or reduce the impact of these penalty and interest assessments.
Pennsylvania allows taxpayers to appeal penalty and interest assessments by filing a petition to the Board of Appeals. Taxpayers will need to complete a petition form for submitting a penalty appeal request with the Board.
The taxpayer should file the petition online through the Board’s website. However, the petition form provides options for mailing or faxing the petition.
Alternative Options The Taxpayer May Consider
Challenge the Assessment/Request for Compromise
If the taxpayer has a proposed assessment for additional income tax due as a result of a State audit, they can appeal the proposed assessment to the Board of Appeals. The taxpayer should file their petition online through the Board’s website.
At this stage, taxpayers may also file a petition seeking a compromise of the taxes. The Board states that they will consider granting compromises in situations where the liability is in doubt and/or it promotes effective tax administration.
If the taxpayer does not resolve the issue with the Board of Appeals, the taxpayer may appeal their decision to the Board of Finance and Revenue (except compromise requests).
Taxpayers may want to consider this option if they have significant personal liability in addition to their taxes owed. In some situations, a taxpayer can discharge taxes through bankruptcy. However, rules and various criteria apply. Taxpayers should seek the advice of an experienced tax and bankruptcy attorney if they want to pursue this option.
The Pennsylvania Tax Amnesty Program
Pennsylvania has had many tax amnesty programs. Recently, this program ended on June 19, 2017. Any delinquent taxpayer should utilize this type of tax program if the State uses it in the future.
This program was for all taxes owed to the State that are administered by the DOR. For taxpayers to participate, they are required to file an online Amnesty Return, file all delinquent tax returns and make the necessary payments within the Amnesty Period. If the taxpayer completed those requirements, then the DOR would waive all penalties, collection and lien fees, and ½ of the interest otherwise due.
As discussed herein, the DOR has a Board of Appeals that was established as a unit within the DOR to be responsible for the review of appeals by taxpayers. However, in most instances, taxpayer appeals are limited to timely appeals of proposed assessments and the penalty and interest appeals.
Alternatively, there are a few practical tips that the taxpayer, or their representative, should follow to reach a reasonable resolution. First, do not be afraid to escalate contentious issues to a supervisor within the DOR. Often, a fresh set of eyes and the authority and experience of a supervisor can help resolve the tax issue amicably.
Second, if you believe that your case manager is not following Pennsylvania law, or discriminating against you, file a request for assistance with the Taxpayers’ Rights Advocate. The Office of Taxpayers’ Rights Advocate can help taxpayers resolve some of the following issues:
- An issue with, or action by, the DOR that has not been resolved by normal, established procedures.
- A delay of more than 180 days
- The DOR failed to provide a response or resolution by the date promised.
- DOR actions that will cause a substantial hardship.
For more information, visit the Taxpayers’ Right Advocate page of the DOR website.
PA Tax Lien Releases
The DOR will only release a tax lien after they have received confirmation the taxpayer has paid their tax liabilities in full. The DOR states that this process usually takes approximately 45 days.
In conclusion, Pennsylvania is not hindered by a statute of limitations to collect past due liabilities. Additionally, the penalty, interest, and collection fees system results in reasonable taxes owed ballooning into a crippling liability. Therefore, taxpayers should consult with a tax professional that has experience with Pennsylvania as soon as these problems arise. They can help determine which course of action is most appropriate for their situation.
Disclaimer: Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.