Back Tax Payers to Get IRS Statements

Paying off back taxes to the Internal Revenue Service is about to get a little less perilous.

The nation’s tax collector said Thursday that, for the first time, it is sending out annual account statements to the 2.2 million individuals and businesses that are paying their taxes on the installment plan. The statements will spell out how much the taxpayer owes and how much has been paid in principal and interest.

“It’s an attempt to get the same kind of disclosure that you’d get with any other type of loan,” said Jackie Perlman, a tax research associate with H&R; Block in Kansas City, Mo. “If you got a personal loan from a bank, you would get an annual statement. But the IRS never had to do that.”

Until now, taxpayers who wanted to know how much they had paid against back tax debts and how much they still owed had to call an IRS service center and get a statement of their account.

They also had to request a separate statement that noted the penalties and interest they owed, said Michelle Lamishaw, an IRS spokeswoman in Washington. The two would be added together for a running tally of their total debt.

Starting this month, Americans who are making monthly payments on their taxes will receive easy-to-read annual statements that will spell out their total tax obligation, the payments received and the interest paid during the year. If a taxpayer owes money for more than one tax year, the statement also will indicate to which tax year the payments were applied.

Although there are just 2.2 million taxpayers with outstanding monthly payment plans, 5.7 million statements will be mailed to provide the information to spouses and professional tax preparers, the IRS said. The mailing started this month and is expected to be completed by Sept. 1.

The new statements are required under a law passed in 1998 to restructure and reform the IRS, which had been criticized for being abusive and unresponsive to taxpayer complaints. That law gave taxpayers the right to pay off their federal income tax obligations over time in certain circumstances. It also created a set of repayment standards and required that the IRS start providing annual statements to taxpayers by this July.

The changes were needed for a variety of reasons, tax preparers contend.

Although the IRS has long offered installment agreements, there previously were no set rules governing who could obtain one, the terms of the agreements or how taxpayers could receive information on the progress of their repayment.

“People often don’t know what they owe,” said Richard Quarterman, an Irvine-based enrolled agent. “It seems to them that the balance never goes away.”

Indeed, because there was no requirement that the loans be paid off in any particular time frame--and because interest and penalties continued to accrue while payments were being made--taxpayers complained that they could fall further into debt with each payment.

The IRS assesses interest charges and nonpayment penalties on past-due balances even while taxpayers are in repayment. The interest rate changes every three months based on prevailing market interest rates--currently 7%. In addition, nonpayment penalties of as much as 3% a year are added.

Moreover, it was up to taxpayers to figure out how much they had paid and whether or not they had satisfied the debts.

“Believe it or not, you wouldn’t know if you had paid off your bill unless you kept track,” said Al Hibdon, a tax accountant and attorney with Hibdon & Podsadecki in Studio City.

Under the 1998 law, installment agreements may be approved only if the taxpayer can repay the tax and penalties within three years. In addition, the law reduced the nonpayment penalties the IRS could charge.