The Tax Man Cometh - Options for Dealing with Unpaid Taxes

For many clients, it’s the equivalent of a knock on the door in the middle of the night—the dreaded letter from the Virgin Islands Bureau of Internal Revenue (“VIBIR”) or the Internal Revenue Service (“IRS”) advising our clients that he or she owes money to one of the taxing authorities or that they have not filed their tax returns. While easier said than done, it is extremely important to remain calm. Although these matters need to be dealt with quickly in order to avoid the imposition of liens and levies, there is generally a period of two weeks to thirty days in which to respond to requests for information or assessments.

Both the VIBIR and the IRS have a limited window in which to assess outstanding taxes. Section 6501(a) of the Internal Revenue Code of 1986, as amended and as applied in the U.S. Virgin Islands (“Code”) generally provides for a three year period during which the VIBIR can assess any additional tax due. The three-year period starts on the date the return is filed, or the due date of the return, whichever is later. The statute of limitations can be extended to six years in circumstances where a taxpayer failed to report more than 25{75f0df2d6e7f7161edac4c5c1d00f29fbd5b5b131330c7e7899506e898c5a87a} of his or her gross income. Also, there is no statute of limitations where no tax return has been filed or where a fraudulent return has been filed. Section 6502 of the Code provides that the VIBIR has ten years to collect unpaid and previously assessed taxes. The ten-year period in which to collect begins on the date of the assessment of the tax. It is however, subject to tolling in certain circumstances and voluntary extension by the Taxpayer. So the first step in the process is to calculate the expiration of the statute of limitations and make sure that the VIBIR still has the authority to assess additional tax.

If the statute of limitations is still open and it is a small assessment of taxes, it is usually in the taxpayer’s best interest to pay the amount owed immediately. Penalties and interest add up quickly and in the Virgin Islands outstanding tax issues impact the ability to obtain updated business licenses among other things. Where taxpayers are unable to pay the amount due in full immediately, or if a taxpayer is facing severe financial difficulties, there are some payment options available. One option for satisfaction of outstanding liabilities is entering into an installment agreement. Another option is an Offer in Compromise (“Offer”). An Offer is an agreement between our client and the VIBIR that will settle the tax liability for less than the full amount of tax owed. To be eligible for either option, the taxpayer must be currently compliant and up-to-date with current-year tax obligations.

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