TAP E04-080

"EZ Pay" safe harbor

Statement of Issue:

Based on IRS statistical data and analysis, the Committee found that A) low and middle income, self-employed taxpayers do not file because they are unable to pay the amount due with the return. One non-filed return leads to chronic non-filing for subsequent years; B) Failure to pay estimated taxes is caused by the following: 1) the quarterly payment calculation is too complex, 2) the pertinent form, instructions and worksheet are lengthy and difficult to understand, 3) low-income self-employed taxpayers often lack the financial ability to pay quarterly, and d) low-income self-employed taxpayers often do not know how to satisfy the estimated tax payment obligation. C) The typical self-employed taxpayer who fails to comply with the estimated tax payment obligations has the following traits: 1) has gross income of less than $50,000 per year (mostly SE income); 2) has no practitioner assistance; 3) receives mostly 1099 income, but often does not receive 1099; 4) owns consumer-oriented business; 5) is not a member of a recognized industry or trade association; and 6) has a high school education or less.

Proposal:

The Schedule C Non-Filer Committee asked the IRS to adopt an “EZ Pay“ Safe Harbor for estimated taxes that would have the following components:

1. impose a 15% flat percentage rate on gross income from self-employment,
2. be available to self-employed taxpayers with total self-employment income not exceeding $50,000 or AGI not exceeding $25,000, with at least 90% of gross income derived from self-employment ,
3. serve as an additional safe harbor to avoid estimated tax penalty,
4. require payments no less frequently than monthly, with taxpayer option to pay more frequently,
5. incorporate EFTPS system and modified “form 8109 coupon/deposit slip” payment procedure,
6. marketing strategy to educate the public as to availability , and
7. non-exclusive, meaning taxpayers would have the option to resort to more complicated estimated tax calculation to avoid penalty.