What does a tax consultant cost? The question arises quickly when the tax return is due or an external audit is imminent. In view of the complex tax-relevant circumstances, professional support is the logical consequence for many. To ensure that there is a happy ending when an invoice arrives at your house, you should first have an understanding of tax consultancy costs.
Imagine the following scenario: your company loses two of its most important clients. This may jeopardize its liquidity. Or a contractor doesn’t deliver, your production stagnates, and your company suddenly faces massive revenue losses. There are many reasons why companies and individuals may have difficulty meeting existing payment obligations in the short run. In these cases, it can be helpful to agree with creditors on a payment deferral to avoid negative consequences caused by late payments.
- What is a deferral?
- Prerequisites for a deferral
- Legal claims for a deferral
- Coronavirus pandemic: deferral of tax payments
- Alternative to deferral: Belated installment
What is a deferral?
As per the definition, a deferral is a form of delayed payment which debtors and creditors agree on to delay the due date of a payment claim beyond the date originally agreed to or as stipulated by law.
In case of a deferral, a debtor will usually be required to make the payment in full by the due date and not only in part, including any interest agreed.
A deferral must be agreed upon by both parties and cannot be declared unilaterally. The creditor is under no obligation to accept a deferred payment. It is a voluntary agreement. In most cases, however, deferring payment is the better alternative instead of letting the debtor default.
Advantages of a deferral for the creditor:
- A creditor avoids legal actions (and associated costs) and increases chance to enforce full claim or part thereof later.
- A creditor can charge deferral interest.
- Deferred payment halts limitation period of the claim, which resumes only after deferral has expired. In this way, the deferral serves to secure claims.
Legally, a deferral agreement is a debt agreement. However, no specific legal form exists for a deferral agreement. Instead, it is usually documented in writing for the sake of being legally enforceable later down the line.
In principle, a deferral may relate to provisions of material or monetary assets. However, it tends to be mostly used for payment obligations.
Prerequisites for a deferral
A debtor is granted a deferred payment if they can plausibly demonstrate why they can’t meet payments on a specific date in the foreseeable future.
Companies that can’t make their loan payments but are able to verify that they’re ahead of a market launch of a new product, which could rectify their liquidity issues, stand a good chance of having their payment installments deferred. Where a business faces production shortages due to unforeseen natural catastrophes or bankruptcy of a distributor, but can verify an otherwise healthy cashflow, they will also be more likely to have their request for deferral accepted.
Businesses that have experienced financial difficulties for a long time and ask for a deferral without providing solid planning or reasons why their economic situation may have changed this year, will find it harder to be granted a deferred payment agreement.
Legal claims for a deferral
A plausible reason for a deferral or subsequent solvency must also be given to federal and government agencies. Some official authorities provide clear guidance on deferred payments that debtors must adhere to. In other words, debtors may have a legal right to defer some payments.
A deferral of the amount due from a tax return will usually be subject to interest charges. When it comes to paying taxes, the IRS allows individuals and companies to file tax extensions to help avoid penalties. These can typically be filed online. Where a payment cannot be made due to insufficient funds, penalties of around 5% of the tax owed for every month of a late payment become due. There is also a 0.5% penalty on the failure to pay the penalty which can increase to 1%.
To avoid these kinds of penalty charges, it’s best to apply for a repayment installment plan with the IRS at an interest rate of 0.25% for every month that an installment is due. The tax authority also recommends that as much tax as possible is paid until the deadline to minimize interest charges.
Where a payment on a tax return cannot be made in full, a partial payment installment agreement or offer in compromise can be applied for. However, where an individual or business is undergoing bankruptcy proceedings, an offer in compromise cannot be applied for.
The IRS may also grant a delay on collection of taxes if, for example, a business can evidence financial hardship. In effect, this means that a tax payment is deferred. A company or individual would still be required to make their payment at a later stage including any interest charges. Tax deferment limits for individuals and small business owners are up to $1 million and $10 million for corporations.
Inheritance may involve tax payments depending on the amount or type of asset inherited. Individuals can apply for a deferral of tax payments or a portion thereof to avoid falling victim to financial hardship because of an inheritance. Types of properties such as capital or resource properties and land inventory taxes become due.
Coronavirus pandemic: deferral of tax payments
In light of the considerable financial burden on business and individual tax payments, the IRS rolled out tax payment deferments in March 2020. Any amount of taxes owed will become due on July 15, 2020, instead. Individuals who may need more time can file a Form 4868 to request an extension on income tax returns for October 15, 2020.
In addition, the IRS removed caps on deferred payments for individuals and corporations. This means the $1 million and $10 million thresholds, respectively, no longer apply. Interest and penalties for non-payments will only become due as of July 16, 2020.
The measures were implemented to improve the liquidity of companies and minimize the economic damage of the health crisis.
Who can apply?
All individuals, small businesses and corporations who are taxpayers can defer their tax payments.
What is the deadline for application?
The filing deadline for federal tax returns is now July 15, 2020. The IRS has advised taxpayers to meet original deadlines where possible to avoid overdue tax payments and interest charges.
What types of taxes does the deferral relate to?
The IRS deferred payment schedule relates to income taxes.
There has been no relief announced, yet, for federal payroll taxes, estate taxes or gift taxes. At the state level, various tax reliefs have been offered. These differ by US state.
How to apply for tax payment deferment?
Individual taxpayers who require more time to file their tax returns can file an extension online using the electronic form to extend the deadline until October 15.
Given the high number of applications during the coronavirus pandemic, it may take a little longer to hear back from the authorities regarding a decision.
If you’re not sure about your application or how to proceed, it’s best to consult with an accountant.
US Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act – a bipartisan support package on March 27, 2020, providing more than $2 trillion in economic relief during the pandemic. You can find out more about it on the official website of the US Department of the Treasury.
Alternative to deferral: Belated installment
Where a debtor is unable to meet payments, a deferral may take the form of belated installments paid to a creditor.
The rules that apply to a deferred payment also broadly apply to the payment of installments. In other words, the debtor is not entitled to installments, but must agree on such a payment method with a creditor. A creditor may or may not accommodate an application for installments. Interest charges will still be likely due.
If a deferral by installment is agreed upon subsequently, i.e. after both parties already agreed to a deferral, these changes should be noted in writing and signed by the creditor.
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