Tax debts can mount up very quickly if they are not managed. Penalties and interest can virtually double the size of a debt in 3 to 4 years. Settling payment terms with the IRD is not a normal commercial negotiation. It requires an understanding of the rules that govern the IRD’s decision-making and the ability to put together a proposal which has the best chance of being acceptable within those rules
Generally speaking the IRD has to balance two things when it considers how to manage a tax debt. First it must try to recover the highest net revenue over time that is practicable within the law: as much money as possible, as quickly as possible. Secondly it has to take into account the effect that allowing someone relief from a tax debt would have on promoting voluntary compliance with the tax system. Alongside these general requirements there are a number of specific rules which affect what the IRD can do in negotiations.
Most people facing a tax debt want to have some of it written off or to pay the debt off over time. Obtaining a tax write-off is difficult but not impossible. Not surprisingly the IRD’s preference is to receive a proposal from the taxpayer which addresses the payment of the tax in full over time.
There are often fishhooks with such deals. The IRD will usually begin by requiring that interest will apply throughout an installment arrangement. That can mean that a taxpayer is on a never ending treadmill if payments do not exceed the high rate of interest the IRD charges. The IRD is not permitted to enter into a deal which would place the taxpayer in serious hardship. Yet if hardship is caused because it requires interest to be paid, the taxpayer can face a “Catch-22.”
Debt negotiations require full and frank disclosure to the IRD of a taxpayer’s assets and liabilities, income and expenditure. This is normally done in an IR590 form.
The IRD will normally seek judgment for an individual's tax debt, or issue a stautory demand to a company which owes tax, if a payment arrangement is not settled and will then consider whether and how to pursue the debt further. Very often taxpayers leave it until this stage to raise a complaint about the assessment of tax that the IRD is chasing. In all but exceptional cases it is far too late to dispute the debt at this point because the tax assessment is deemed at law to be conclusive.
In many cases the IRD’s ultimate step is to try to bankrupt an individual debtor or to liquidate a corporate debtor. These steps can be delayed in some cases when it is possible that the debt may still be paid and there are alternatives to liquidation that can apply in such cases with the IRD’s agreement.
Geoff Clews has negotiated many debt settlements with the IRD and has defended many clients against debt actions brought by the IRD.
For answers to frequently asked questions about tax debts, click here.
To contact us for help with IRD over a tax debt, click here.