Review of Some Arizona State Tax Resolutions for Back Taxes
Do you have Arizona state back taxes? If you’ve gotten behind on your state tax obligations, don’t despair. You have a few different options if you cannot immediately pay the state in full.
In Arizona, the Arizona Department of Revenue (ADOR) is responsible for administering Arizona’s tax laws and collecting them. Moreover, if you owe back taxes to the Arizona Department of Revenue but can’t pay in full right away, you may qualify for programs such as a:
- Payment Arrangement – A taxpayer agrees to pay his or her tax liability through monthly installment payments over a specified period. Therefore, if a taxpayer follows the terms of the Payment Arrangement, the taxpayer will pay off the tax debt. See the previous link to read more details.
- Offer in Compromise (OIC) – Taxpayers who owe more tax than they can afford to pay can submit an offer to the Arizona Department of Revenue to pay a specific amount of money instead of the total tax liability. Consequently, if the ADOR accepts that offer and the taxpayer fulfill the terms of the agreement, the remaining tax liability falls off. Generally, the ADOR offers 24-month payment plans. See the previous link to get more details.
- Apply for a Taxpayer Assitance Order (TAO) – Taxpayers may apply for a Taxpayer Assistance Order using Form 91 (discussed below). Specifically, taxpayers can pursue this option if the taxpayer can not resolve tax issues through normal administrative channels.
- Innocent Spouse Relief – Allows individuals to request relief from tax liability if they think that only their spouse or former spouse should be held liable (discussed below).
Statute of Limitations
The Arizona Department of Revenue has ten years to collect any tax, interest, or penalty required to be collected by the department for any tax period once it becomes final. Therefore, if the ADOR fails to collect within those ten years, the taxpayer’s obligations to pay are extinguished unless:
- the department has commenced a suit to collect the debt pursuant to section 42-1114
- the taxpayer has agreed in writing to extend this time period before the time period expires
- enforced collection has been stayed by the operation of federal or state law during this period. The period of limitations prescribed by this section is extended by the period of time that the department was stayed from engaging in enforced collections.
Requesting a Taxpayer Assistance Order (TAO)
If a taxpayer is facing significant hardship, he or she may apply for a Taxpayer Assistance Order (TAO) using Form 91. In short, the TAO can provide for a temporary suspension of departmental actions when the Problem Resolution Officer (PRO) reviews the case. Specifically, the PRO can grant three types of temporary relief:
- Release a levy on the taxpayer’s property
- Stop any action from the ADOR or
- Prevent the ADOR from initiating further action
In other words, the PRO can ask ADOR to stop certain collection activities (liens, levies, and seizures, for example) while the PRO reviews the taxpayer’s case.
Arizona TAO’s helps taxpayers who may face significant hardship. Significant hardships include:
- an immediate threat of adverse action
- a delay of more than 30 days in resolving your account problems
- incurring costs if ADOR does not grant relief
- and irreparable injury or a long-term adverse impact if ADOR does not grant relief
Someone would apply to give themselves and their Problem Resolution Officer time to review their case to see if there are alternatives which can help to relieve the hardship. Above all, PROs make findings of significant hardship on a case by case basis. Thus, if a PRO does not grant a TAO, a taxpayer may consider a payment arrangement or an OIC.
A TAO suspends the applicable statute of limitations. In other words, the statute of limitations is suspended from the date you apply for the order or the date the order is issued, whichever is earlier, until the order’s expiration date, modification date or rescission date.
Common Factors a PRO Considers With Significant Hardship
Common factors that a Problem Resolution Officer may consider when making a significant hardship determination include:
- whether there is a likelihood that hardship will result before normal procedures have time to take effect
- the taxpayer’s ability to retain housing, utilities, or employment is affected
- there is a change of irreparable damage to your credit rating
- the taxpayer’s ability to obtain food, clothing or medical treatment is affected
- there is a likelihood of serious financial hardship, such as an imminent bankruptcy or inability to meet payroll
- or there is the possibility of the loss of opportunity to provide education for the taxpayer or the taxpayer’s family.
Your PRO will not consider or respond to frivolous arguments made by taxpayers.
Applying for a TAO:
Someone can apply for a TAO using Form 91.
The quickest way to submit Form 91 is to fax it to the PRO at: (602) 542-4772. Alternatively, you can also mail the form to:
Problem Resolution Officer
Arizona Department of Revenue
1600 W Monroe
Phoenix, AZ 85007
There are no application or processing fees to apply for a TAO.
Innocent Spouse Relief (ISR)
Typically the ADOR holds spouses who file joint income tax returns jointly liable for any tax liability. However, if a taxpayer believes that they should not be held responsible for the tax liability that their spouse incurred, they may be eligible for innocent spouse relief.
Arizona offers innocent spouse relief, which allows individuals to request relief from tax liability if they think that only their spouse or former spouse should be held liable. Moreover, Arizona offers three different types of innocent spouse relief:
- separation of liability
- innocent spouse relief, and
- equitable relief.
When to Apply for Each Type of ISR
To request for separation of liability, a taxpayer must have filed a joint return that has an understatement of tax due to an item of your spouse. Alternatively, for an innocent spouse relief request, a taxpayer must have filed a joint return that has an understatement of tax due to an incorrect item of your spouse. Finally, to request equitable relief, a taxpayer must have filed a tax return that has either an understatement or an underpayment of tax; or the taxpayer was issued a joint assessment for them and their spouse. In addition, taxpayers should apply for innocent spouse relief as soon as you become aware of an unpaid tax liability that you think that your spouse or former spouse should pay.
A taxpayer would apply for one or more of the three types of relief if there was an understatement of tax due to an item of their spouse, an understatement or underpayment of tax, or ADOR issued the taxpayer a joint assessment.
If ADOR grants a taxpayer relief for underpaid tax, the taxpayer becomes eligible for a refund of separate payments that he or she made. However, the taxpayer doesn’t receive refunds of payments made with the joint return, joint payments, or payments that their spouse or a former spouse paid.
If ADOR grants the taxpayer relief for an understated tax, the taxpayer becomes eligible for a refund of certain payments made under an installment agreement that they entered into with the department if they have not defaulted on the installment agreement.
How to Apply for ISR
To request innocent spouse relief the taxpayer needs to fill out Arizona Form 200. Furthermore, once the taxpayer fills out the form, ADOR will review the form, contact your spouse or former spouse, and make a decision. You then need to mail the form to the Arizona Department of Revenue at:
Individual Income Tax Audit
Attention Form 200
Arizona Department of Revenue
PO Box 29084
Phoenix, AZ 85038-9084
If the taxpayer obtained ISR from the IRS, then the taxpayer must send a copy of any IRS letter granting you innocent spouse relief and a copy of your completed Federal Form 8857 to the Arizona Department of Revenue. Furthermore, there are no application or processing fees for obtaining innocent spouse relief.
Injured Spouse Relief
Injured spouse relief is for taxpayers whose share of an overpayment shown on a joint return was or is expected to be applied against their “spouse’s past-due state taxes, child support or spousal maintenance, or debts owed to another Arizona state agency.”
If a taxpayer becomes an “injured spouse,” they may be entitled to receive a refund of their share of the overpayment. For taxable years beginning on or after January 1, 2017, an injured spouse must use Arizona Form 203 to make a claim. In addition, the taxpayer and spouse must file a joint income tax return and include a completed Form 203 with that return.
Other Tax Resolutions for Arizona State Back Taxes
Penalty Abatement (PA)
Penalty abatement is when a taxpayer requests the ADOR to abate a tax penalty if the conduct or lack of conduct that caused ADOR to impose the tax penalty was due to reasonable cause and not due to willful neglect. The Penalty Review Unit (PRU) administers the penalty system and receives requests for penalty abatement.
To apply for Penalty Abatement, a taxpayer will have to fill out Arizona Form 290
You must mail or fax the completed form to:
Penalty Review Unit, Division 9
Arizona Department of Revenue
1600 W Monroe Street
Phoenix, AZ 85007-2612
Fax Number: (602) 716-6787
It will take the Arizona Department of Revenue up to six weeks to process the form. Moreover, taxpayers need to provide documentation that supports the basis of your request, such as:
- front and back copies of canceled checks
- tax returns
- medical reports
- death certificates or any other pertinent documents
ADOR will not abate the following:
- Transaction privilege tax licensing fees and penalties
- Assessed penalties from an audit
- Transaction privilege tax licensing penalty
Tax Consequences for Arizona State Back Taxes
It’s important to file and pay your income taxes on time in Arizona. If you fail to file your income tax returns and pay the amount owed on time, you will be subject to late penalties.
Failure to Pay Penalty
If you fail to pay your taxes on time, ADOR will assess .5% of the tax due on the return per month.
Taxpayers are also subject to penalties for underpayment of estimated taxes. If their Arizona gross income exceeds the prescribed thresholds for the current or prior taxable year for a person’s filing status, Arizona requires that an individual make estimated payments to cover the amount not covered by withholding during the taxable year. Estimated payments are due quarterly.
If a taxpayer files an extension, the taxpayer is required to pay 90 percent of the tax shown on their return by the original due date of the tax return. Therefore, if the taxpayer fails to pay that 90 percent, an extension underpayment penalty of .5 percent of the tax unpaid per month will be charged from the original due date until the date paid.
The underpayment penalty is .5 percent of the tax that is unpaid for each month or fraction of a month the tax remains unpaid.
Taxpayers should use Form 221 to calculate if they paid enough estimated income tax and to determine if they are subject to penalties for late or underpaid payment.
Failure to File Penalty
There is a late filing penalty of 4.5 percent of the tax required to be shown on the return for each month or fraction of a month that the tax return is late.
The ADOR charges interest for any unpaid tax from the due date of the return until the date of the payment. Specifically, Arizona’s interest rate matches the federal interest rate.
Enforced Collections for Arizona State Back Taxes
Arizona allows wage garnishments for unpaid income taxes. The amount of money ADOR can garnish from each paycheck in Arizona is governed by federal law. In fact, out of a taxpayer’s nonexempt disposable earnings, creditors can only take the lesser of 25% of your non-exempt weekly earnings or the amount of your non-exempt weekly earnings that exceed 30 times the federal minimum wage.
If you have more than one garnishment, the total amount the state can garnish is limited to 25%.
Depending upon the amount owed and the length of time it will take to repay a liability, the Arizona Department of Revenue may choose to file a tax lien. Moreover, the ADOR may file a tax lien when the taxpayer has set up an installment agreement.
Arizona has the power to levy your bank account to satisfy unpaid taxes. In other words, it means the ADOR can take the money in your bank account to satisfy the unpaid taxes. Specifically, a levy may be initiated against you if you fail to make a payment arrangement with the ADOR, fail to respond to a final demand notice, fail to fulfill the terms of your payment arrangement or fail to provide financial information to the ADOR upon request.
If the state levies your bank account, the bank is required to hold the funds you have on deposit. Generally, they must hold up to amount you owe for 21 days. Therefore, twenty-one days provide taxpayers time to:
- resolve any errors about the levy
- make arrangements to pay the amount due, or
- seek advice from a legal or tax professional about the best course of action.
Arizona does not suspend or not renew professional licenses for unpaid taxes. Moreover, they do not suspend drivers licenses for unpaid taxes.
If you have any questions or concerns about Arizona state back taxes, it is advisable to work with a tax professional. Moreover, if you are applying for an Offer In Compromise or Payment Arrangement, consult with a tax professional. Tax professionals can ensure you are filling out the forms correctly and proposing an arrangement that the Arizona Department of Revenue is likely to accept.
Disclaimer: The content on this website is for educational purposes only. It does not serve as legal or tax advice. For specific help regarding your tax situation, contact a licensed tax professional or tax attorney.