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Late payments of taxes are stressful enough. Late tax payments are stressful enough as it is. The situation becomes even more complex when you have debts to the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB). You could be issued two separate collection notices, penalties, interest charges, payment deadlines, and enforcement actions from two different tax agencies.

The bright side is that even if you owe both agencies, it’s not a requirement that you pay everything up front. You might be eligible for payment arrangements, hardship relief, or a settlement with one or both agencies, depending on your financial situation.

The challenge is to strategically coordinate these options. A solution to federal tax debt does not necessarily solve California tax debt, and neglecting either entity can prove to be a bad financial move.

The first step in developing a realistic tax resolution strategy is to develop knowledge of how the IRS and FTB work in isolation.

IRS and California FTB are two different tax authorities. Each agency determines its own liabilities, penalties/interest, financial information, and collection options.

This means:

• Just as a payment plan with the IRS doesn’t automatically create a payment plan with California, a payment plan with California does not automatically create a payment plan with the IRS.
• An IRS Offer in Compromise is not a guarantee of the resolution of your FTB balance.
• An FTB settlement will not extinguish a federal tax liability.
• One agency’s hardship determination does not necessarily mean that the other will grant relief too.

FTB evaluates offers it receives for tax relief separately from offers received by the IRS and other agencies.

This gives rise to what many taxpayers find to be a double agency issue – two balances, two collections, as well as two financial assessments, perhaps.

The best approach is to synchronize both cases and to review each agency’s needs separately.

Step 1: Identify What You Owe

When deciding whether to negotiate with one or the other agency, find out the total amount of your tax debt.

First, get a copy of your IRS account transcript and check your FTB account on MyFTB.

Identify:

• The tax years in question.
• The original tax that was levied.
• Penalties and interest earned.
• All payments and credits that have been applied.
• Outstanding tax returns.
• Existing installment agreements.
• Collection notices, liens, or levies.

Avoid depending on the balance indicated on a previous notice. Interest and penalties could have gone up since the notice was issued.

In addition, ascertain if the liability is correct. A response may not be a payment arrangement if an agency has determined that there was missing information on the return, income was reported incorrectly, or the agency thinks you may have filed an incorrect return.

Note: If a taxpayer does not agree with the amount the IRS considers the tax bill, he or she shouldn’t automatically seek an Offer in Compromise. In California, you must agree to the liability for the OIC program, and in general, the IRS will assume an offer is made on a defined tax debt basis.

Step 2: File All Missing Tax Returns

One of the most crucial conditions for resolving federal and state tax debt is filing compliance.

Generally, you should try to file the returns that are required as early as possible, even if you don’t have the means to pay.

If returns are not received, they could make you ineligible for some payment options or settlement programs. They can also cause further evaluations, fines, and collection hassles.

Some practical measures are:

1. Determine the number of all omitted returns, federal and California.
2. Collect the W2s, 1099s, business records, and deduction information.
3. Make correct returns based on the available documentation.
4. Check any alternate returns filed by the IRS or FTB.
5. Verify the agencies have received and made the required filings.

Taxpayers who want to be issued an OIC must file their required returns and pay estimated tax for the current year. In addition, California demands that returns be filed prior to filing an OIC application.

Filing returns does not end collection activity, but it helps to build the basis for assessing the resolution options.

Step 3: Make a Federal vs. California Resolution Decision

The IRS and FTB have several options to consider for unpaid tax debt. Their requirements and processes, however, vary.

• IRS Installment Agreements

IRS installment agreement enables qualifying taxpayers to settle their federal tax debt in installments.

A person can be offered short-term (up to 180 days) or long-term (monthly installment agreement) payment plans.

The IRS currently offers online options to apply for a qualifying balance, such as long-term plans, for individuals if combined tax, penalties, and interest are $50,000 or less, and required returns have been made.

An installment agreement might be a good option if:

• You are able to count on a steady income every month.
• After paying for essential expenses, you have money left over for payments.
• The entire balance isn’t due at the same time.
• There will be a steady financial condition.

Usually, interest and any applicable penalties are still accrued during the time the balance is outstanding.

• California FTB Payment Plans

California has installment plans available for those who are not able to pay their state tax obligation at once.

The FTB normally provides taxpayers the ability to pay over a period of years (typically three to five).

The eligibility requirements published online are a balance of $25,000 or less, ability to pay in 60 months, and five years of required income tax filings in the previous five years.

Use of an FTB payment plan should be considered to prevent escalation into collection, but it does not guarantee that all collection actions will cease.

The key is that an IRS payment plan and an FTB payment plan must be considered and set up separately.

• Offers in Compromise

An Offer in Compromise might enable a taxpayer to reach a settlement with the IRS for less than the complete amount of tax debt.

When determining your eligibility for a tax credit, the IRS takes into account:

• Income
• Necessary living expenses
• Asset equity
• Ability to pay
• Future financial circumstances

The IRS will not accept an offer when the taxpayer could pay the debt in full by an offer in compromise or through available assets.

The California OIC program also considers income, assets, expenses, capacity to pay, and potential changes in financial circumstances.

In general, however, California is going to require an FTB offer to be a lump-sum payment, and they will use it separately from any settlement with the IRS.

This is important when dealing with negotiations with both agencies.

One of the two taxing authorities, IRS or FTB, may be able to settle a claim while the other cannot. Both agencies do not necessarily have to be paid.

In Step 4: Build a Financial Plan That Accounts for Both Agencies

The biggest blunder taxpayers can make is to renegotiate with the IRS without taking California into account.

If a monthly household income of $8,000 is needed, and you actually have $6,500, you would be living 1.25 times your income. If you have a household income of $8,000 and a required living expense of $6,500, you would be living at 1.25 times your income.

So far, you’ve got $1,500 left over after making all your other payments, emergencies, and other tax payments.

If the IRS suggests a $1,000 per month installment payment, there could be just $500 remaining for California tax debt.

This may lead you to be in compliance with one agency and not meet the standards with another.

It is better to consider the balance of both.

Make a Consolidated Financial Statement

Include:

• Monthly household income
• Funds needed for housing and utilities
• Costs of food, transportation, and health care
• If applicable, the cost of operations of a business
• Outstanding loans and other liabilities
• Account balances in banks and investments
• Other large assets, such as home equity
• Payments under pre-existing contracts

The idea is to find out how much they can afford you without putting yourself in too much of a financial strait.

Keep in mind the IRS and FTB can have different criteria for what constitutes a financial standard with respect to expenses and ability to pay, though.

California may even consider the possibility of an increase in your future income and whether your financial situation may improve.

Step 5: Address Collection Actions Before They Escalate

Both have significant collection powers.

Failure to pay notices may lead your tax liability from simple billing to more serious enforcement.

Federal Collection Actions

The IRS may:

• File a tax lien with the Federal government.
• Levy bank accounts.
• Garnish wages.
• Seize certain assets.

A federal tax lien is a legal claim to your property, and a federal tax levy is the actual process by which property or funds are seized to satisfy a tax debt. California collection actions

The FTB can then place a state tax lien on a taxpayer’s property, garnish a taxpayer’s wages, or levy a bank account or seize property if appropriate.

A recorded state tax lien can be made public record and result in property transactions and credit-related activities being affected. If you have a levy letter, what do you do?

What Should You Do After Receiving A Notice?

Do not ignore it.

Instead:

1. Determine the agency that has issued the notice.
2. Ensure that tax years and balances are correct.
3. Check the deadline and appeal procedures.
4. Call the agency immediately.
5. Identify if a payment plan, hardship application, or formal appeal is suitable.

The federal and California collection procedures are not the same. An IRS notice may not have a deadline or appeal option available that would be applicable to an FTB notice.

Professional tax resolution help can be especially critical if you already have taxes being levied against your wages or bank account.

Step 6: Discuss Penalty Relief and Financial Hardship Options

Tax debt might also contain significant penalties along with the tax.

Penalty relief may lessen the amount due, depending on the situation.

The IRS provides penalty relief to qualifying taxpayers, such as those making qualifying requests for penalty abatement for the first time and those who have reasonable cause.

California has a set of penalty relief procedures and eligibility requirements.

Penalty relief does not remove the tax or interest, however.

To avoid significant financial hardship, the IRS will temporarily postpone collection if the taxpayer is not able to pay without hardship.

California could also take the approach of temporarily delaying collections if a taxpayer faces financial hardship. The OIC process may lead to a delay of the collection where it is appropriate if there is a hardship.

These options can give you breathing space until you can work out a longer-term resolution plan.

Step 7: Federal Tax Adjustment affecting California

A significant issue is when the IRS adjusts your federal tax return.

California mostly starts with federal income information when computing certain state tax liabilities. But California does not necessarily follow all federal tax laws.

An adjustment by the federal audit, therefore, may result in extra California tax responsibility.

For instance, the IRS may propose an adjustment in your taxable income after auditing you, and the FTB may look at the adjustment and decide that California is also liable.

You can enter into a separate state-option balance even though you’re negotiating a federal settlement.

Taxpayers should:

• Carefully review federal audit adjustments
• Identify if an amended return to California is necessary
• Determine if adjustments are needed for California
• Follow FTB notices within the time frame
• Don’t presume that a federal settlement resolves the state liability

This is especially relevant for those taxpayers who have business income, investment gains, and/or deductions that have been impacted by the disparity between federal and California tax laws.

You can save a lot of time and money through a coordinated resolution strategy.

1. Be sure not to overlook either agency – each notice needs an answer.
2. File before negotiating: Settle outstanding returns and get into filing status.
3. Safeguard your current finances: Don’t take on payments that you can’t afford.
4. Pay current taxes: Make the necessary withholding adjustments and estimated payments.
5. Keep copies: Keep copies of notices, account transcriptions, financial statements, and proof of payment.
6. Check both balances frequently – penalties, interest, and other adjustments can alter the amount that is owed.
7. Do not come with unrealistic settlement offers; there is no tax professional who can guarantee the IRS/FTB will accept an Offer in Compromise.
8. Seek expert advice: A tax professional, such as an enrolled agent, CPA, or tax attorney, can assist in coordinating discussions and determining eligibility.

With both the IRS and owing both in the mix, it can be a complex financial situation, but you’re not without options.

The point is that federal and state tax debt must be dealt with independently.

An IRS installment agreement, California payment plan, Offer in Compromise, penalty relief request, or hardship arrangement may be able to help you with various aspects of your financial situation.

The best way starts with getting accurate information on the accounts, full tax returns, a sensible financial evaluation, and a plan communicated between the two agencies.

Don’t wait for federal and CA tax collection activities to escalate if taxes are owed. Knowing your choices early on can help you safeguard your finances and work towards a more manageable solution.

Can an IRS payment plan cover my California tax debt?

No. You will have to make arrangements to pay both the IRS and the California FTB. They are completely separate.

Can I settle both IRS and California tax debt for less than I owe?

Maybe. Offers in Compromise are available through the IRS and California FTB. Each will look at your income, assets, outgoings, and capacity to pay, and there is no guarantee that if you are approved by one, you will be approved by the other.

What happens if I can’t afford to pay the agency?

You may also be eligible for some relief due to financial hardship. The IRS and FTB can look at your situation to see if collecting would cause you a great deal of trouble. This will depend on your income, outgoings, assets, and personal circumstances.