Filing Back Taxes

Jan Roberg can help you file back taxes.

If the IRS has been filing your tax returns for you, it's a good idea to hire a professional to fix them.

Did you get one of those notices by the IRS that says you owe money for 2005, 06, and 07 but you never even filed a return in the first place?  You’d be surprised, you’re definitely not alone.  Lots of those notices have gone out lately.  If you’ve got several years of back taxes that need to be filed, I recommend hiring a professional to do it for you.  (Okay, namely I think you should hire me, but then again this is my website.)
But seriously, there’s a reason you didn’t file your taxes in the first place; maybe they were too complicated, maybe you were going through a divorce or suffering from a death in the family, or maybe you were just being lazy.  Whatever the reason, the problem has gotten to the point where the IRS is threatening you– so you need to get yourself a buffer zone.  Someone to put a little distance between you and the IRS, it keeps it a little less personal.  Plus a professional will know all those funky little tax law changes:  2007 was the telephone tax credit, 2008 had that $300 recovery rebate credit you missed because you didn’t file, and stuff like that.  You don’t want to lose out on those things.
If you hire a tax professional that’s worth her salt, the first thing she’s going to do is to contact the IRS and get all of the information they have on you.  That will include your wage and income transcripts, your account transcripts, and any return transcripts they may have.  Even though you didn’t file tax returns, the IRS filed one for you, that’s how they came up with what they’re assessing you for.  It’s a waste of time trying to negotiate with the IRS if you don’t know what information they’re using.  Remember, when the IRS files for you, it’s always the worst possible tax status and you get no deductions.
The next step is to prepare all of your income tax returns.  Not just for 2005, 06, and 07—in order to be in compliance (that’s the term the IRS uses for someone who’s in good graces with the IRS) you must have all of your tax returns filed and up to date.  You can’t set up a payment agreement to get yourself out of an IRS levy if you haven’t filed all of your returns.
If you’ve been a good doobie and responded to the first IRS notice immediately, they’ll give you 30 days to file and then you can usually get another 30 day extension before you have to deal with any consequences.  If you’ve blown off the IRS a couple of times already, they will not be so willing to wait for you.  The problem is that you might not know that you’ve blown them off, especially if you’ve moved and they have the wrong address for you.   Don’t assume you’ve got 30 or 60 days unless the IRS tells you they’re giving you that much time.
Each tax return must be mailed in a separate envelope.  People mess that up all the time.  Older returns go to one address, current returns go to another.  And the addresses vary depending upon where you live.  (Another reason it’s a good idea to get professional help.)  Even if you’re sending two or three returns to the same address, you still need to put them in separate envelopes.  (Think of a little kid going through a box of cereal looking for the prize.  Once the prize is found, he sort of forgets about the cereal.  It’s the same with tax returns and envelopes.  Once an IRS agent opens the envelope and finds a tax return—everything else is forgotten, that other return does not exist, only the first one he finds is real.)
Once you figure out what your real tax liability is (remember there will be penalties for late fling, late payment, plus interest), then you can negotiate a payment agreement or perhaps an offer-in-compromise if you qualify.  It all depends upon how much you owe and what you’re able to pay.  A simple payment agreement can be negotiated in about 10-15 minutes, while an offer-in-compromise can take 6 months or even longer.
On the “fun” scale, filing back taxes is right up there with root canals and colonoscopies.  Nobody wants to do it, but you reach a certain point and you just have to.  And, not unlike a colonoscopy or root canal, you want someone you trust doing the work.   If you’re in the “back tax” situation, the sooner you just get it done, the better off you are.  On the bright side, you’ll feel better when it’s all over.

How to Negotiate Your Own Payment Agreement With the IRS

Tax On Money Background
I’ve heard two stories in just as many days about people who paid one of those TV tax companies thousands of dollars to help them with their IRS debt and when all was said and done, all they got was a monthly installment agreement with the IRS.  I’ve got a big problem with that–because in both of those cases, the people could have used that money to pay down their debt–and done the installment agreement themselves for free.
While not everyone can handle their IRS tax debt problem themselves, before you go sending thousands of dollars to some company with a 1-800 phone number, lets see if you can handle this yourself for free first.
The first question:  Do you really owe the money in the first place?  That’s pretty important.  If your taxes were professionally prepared and you have a huge balance due-well you probably really do owe the IRS.  On the other hand, if you haven’t filed for several years and the IRS says you owe them lots of money–there’s a good chance you don’t.  Anybody does taxes better than the IRS–anybody!  The CPA down the hall, H&R Block, VITA, the really bad tax place I won’t name down the street, and even my high school intern — they all do taxes better than the IRS.
True story:  a couple of years ago, I had a high school intern while I was working at the big tax company.  She had only been there for a couple of days, she was supposed to help with the phones, photo copies and data entry type stuff.  A woman came to me with an IRS tax debt of $16,000.  I took the case, but I was busy working on another return so I asked the intern to just do the basic data entry work for me.  A little while later she came to me and said, “I did the data entry but I’m afraid you’re going to have to show me what I’m doing wrong.”  “What do you mean,” I asked, “It’s just data entry.”  “I know,” she said, “But I heard you say she owes the IRS $16,000 and on all the returns I input she’s got refunds!”
I looked over everything the girl had done.  It was perfect.  Instead of the woman owing the IRS $16,000, the IRS owed her $8,000.  So when I tell you that anybody prepares a tax return better than the IRS–I’m not kidding.  Now you can go to an IRS office and they will help you with a return–those people know what they’re doing (usually), but those computer generated IRS returns that get mailed to you are garbage.  Plain and simple.
Second question:  Do you owe less than $50,000?  If you owe more than $50,000, you won’t be able to do an IRS streamline installment agreement.  If you can pay enough on the debt to bring it to $50,000 or less, then you can still do the streamline–otherwise you are going to want to get some help with your debt.  But let’s say you owe $52,000.  Well, you could pay some tax company $8,000 to negotiate for you, but if you paid $2,000 towards the debt, you could negotiate for yourself and still have $6,000 more pay your debt or buy groceries or whatever.
Third question:  How much can you afford to pay each month?  Let’s say you got hit with an IRS bill of $6,000 and you just didn’t have any money saved to pay it.  Realistically, look at your financial situation and figure out what you can afford.  What’s the most you could possibly pay without causing yourself a hardship?  That’s going to be your upper limit number.  You need to think it through because you don’t want to commit to paying $500 a month if it means you lose your house.
Here’s the mechanics of it:  In a perfect world–you should be able to pay of your IRS debt within 2 years (24 months.)   So if you take that $6000 and divide it by 24, then your monthly payment would be $250.  And if you can afford that–great!  That’s the preferred timeline for the IRS to have you pay off your debt.
But if you can’t handle the $250 a month, you need to know that the IRS will go as far as 72 months (or six years) for you to pay off the debt.  So if you take $6,000 and divide that by 72 then you get $85 dollars a month (I rounded up to the nearest 5.)
What you might want to do is negotiate the $85 payment, but then pay the $250 to get rid of the debt faster.  That way you’ve got some wiggle room if you lose your job or have some other issue.
Here’s the other stuff you’ve got to know:
There is a fee of $105 for setting up the installment agreement.  It’s lower if you set up direct debit from your checking account or it may be reduced if your income is low–make sure you ask about it, they won’t always tell you.
If you’re trying to negotiate a payment agreement and things are just not going your way, it’s okay to
back out before you commit.  Tell them that you think you’re going to need professional help and that you will have to call them back later.
Once you do have an agreement, you have to hold up your end of it.  Make your payments on time.  If you’re late, your installment agreement is void and you’ll have to start all over again–including the $105 fee for setting up the agreement.  (Not to mention those nasty letters they send about putting a lien on your home and levying your bank account.)
One final word, if you can’t handle the installment agreement yourself–maybe your tax issue is too complex or you’re just too intimidated to deal with the IRS, get help from a local professional.  You’ll need an enrolled agent or CPA because they’re licensed to represent you before the IRS.  I recommend using someone local (okay, someone like me) that you can meet with in person.  Sometimes, IRS debt issues will cost a few thousand dollars to settle up, depending upon the work that needs to be done.  But it’s important to know what is going to be done before you pay that kind of money out.  $8,000 for something you can do yourself is too high a price.  Ask questions, know why they’re charging you that much, and what you’re getting for it.  You have a right to know.

I Lost My Job and Can’t Pay the IRS

going out of business

Photo by Timetrax on flickr.com

I write a lot about what to do if you can’t pay the IRS, but this is new stuff just for 2011 taxes.   If you’re out of work, or if you’re self-employed and your income is lower than last year, you may be able to apply for an extension of time to pay your 2011 income tax–so you don’t get hit with late payment penalties.

Who can qualify?
  • First, your adjusted gross income (that’s line 38 on form 1040) must be less than $100,000 (or $200,000 if you’re married filing jointly.)
  • Second, you need to owe the IRS less than $50,000.
What’s considered a good reason for filing?
  • Losing your job, for one.  If you were unemployed for at least 30 consecutive days in 2011 or the first part of 2012, then you can apply for relief.
  • Or, if you’re self employed, if your business income is 25% or more less than what it was in 2010, then you also can qualify.
What other things do I need to know?
  • The relief is only good for your 2011 taxes.
  • It only helps with the failure to pay penalty, you’ll still have to pay the interest on your late payment (about a 3% annual interest rate.)  You’ll also have to pay any other penalties that you might owe.
  • If you don’t pay the amount of tax you owe in full by October 15, 2012–then you’ll still wind up paying the penalty and it will be back-dated to April 15th.
  • If you apply for the late payment relief, you must have your tax return or extension filed on time.
So if I want to apply, how do I go about it?
The form you need is called:  Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship.   That’s a mouthful isn’t it?  Fortunately, it’s easier to fill out than it is to say.  The form number is called 1127-A.  Here’s a link to the IRS website so you can download it yourself:

http://www.irs.gov/pub/irs-pdf/f1127a.pdf

Besides stuff like your name and address, you only need to know your adjusted gross income and the amount of tax you owe.  You can’t e-file the form with your tax return, you have to print it and mail it in.  It doesn’t go to your regular tax office–it’s either going to be mailed to Huntsville, New York or Fresno, California.  Look at the instructions on page 3 of the form to learn where you should mail your form.

Why would I want to do this?
Basically, if you owe taxes and can’t pay, the IRS charges ½ of one percent on the balance due each month that you haven’t paid.  So, after 5 months–that’s a 2.5% penalty.   So if you owe $5,000 that would cost you an extra $125.  That might not seem like that much but why pay the IRS more than you have to?  If you think you can come up with the money within 5 months–why not take advantage of the break?
One last piece of advice
I wind up dealing with lots of people who just don’t bother to file their tax returns because they owe.  That’s a really bad decision.  You see, the penalty for paying late is only ½ of one percent per month, but the penalty for not filing is 5% per month.  So if you take that $5,000 I mentioned earlier and you didn’t file your return because you knew you owed–well the penalty for that would be $1,250 if you waited until October to file.  Now that’s a pretty serious chunk of change so make sure you file your return–or at least file an extension, by April 17th.   You really don’t want to give the IRS any more money that you have to, do you?

I Want to Settle My Tax Debt for “Pennies on the Dollar”

You’ve seen those late night TV ads with the little old lady who says that JK Harris settled her IRS tax debt for “pennies on the dollar.” Or maybe you’ve seen the red bearded guy who tells you his company, Tax Masters with its team of ex-IRS agents has helped “many good people just like you.”

And maybe you’ve wondered if they could help you too. Well no, they can’t. They’ve both filed for bankruptcy and their doors are shut. Part of the problem being was that their advertising was a little misleading.

Does that mean that you can’t settle your debt with the IRS for “pennies on the dollar”? No, that option is still available–it’s called an “Offer in Compromise”, but it’s not an option for everyone. An offer in compromise is only for people who genuinely can’t pay their tax bill–when all of their assets and future earnings are taken into account.

In 2010, there were over 57,000 Offer in Compromise applications submitted to the IRS–only 14,000 of them were accepted. Most of the problem with those rejected applications is that many people submitting Offers in Compromise don’t know the rules regarding spending and assets. When you’re filling out the form, you may say that your monthly mortgage payment is $2000, but the IRS has specific guidelines on what’s an allowable housing expense–if your payments don’t fall within the IRS guidelines, they don’t count. So if you live in an area where the IRS says that your monthly housing payment should only be $1500–that means you have $500 a month that the IRS says you can pay towards your tax bill–an offer would be unlikely. Now you don’t have an extra $500 a month, I get it–but to the IRS, if you owe them money, then you should live in a smaller house.

And although the IRS is rather generous about medical expenses–many of the alternative medicines and treatments are not considered to be “legitimate” medical expenses in an Offer in Compromise. So while the IRS would count your payments for your chemotherapy, they would take off the costs of the holistic vitamin program that you use. You need to keep that in mind if you’re using any kind of “unconventional” treatment. It doesn’t matter that it’s saving your life, if it’s not in the IRS book–it’s not a legitimate medical expense.

For an Offer in Compromise, there are national charts showing what you’re allowed to pay for food and clothing. There are charts for how much your housing should cost broken down by county. And there are different expense rules for senior citizens and younger folks as far as medical expenses are concerned. And you’ll have different rules for bus riders, car owners, and people who are still paying off their car. There’s a labyrinth of tax codes and charts to go through.

And I know this sounds harsh–but I want to make sure you understand how difficult it is to win an Offer in Compromise–if you have equity in your house–the IRS basically assumes that you can sell it for 20% less than what it’s worth and use that money to pay your tax bill. So basically, an Offer in Compromise isn’t usually a good option for homeowners with any equity.

If you don’t know the rules before submitting your application–you could lose before you even begin. That’s why it’s important to get professional help when submitting an Offer. And this is where it’s helpful to have someone who can meet with you in person, understand your situation, and fight for you because they know you’re a person and not just some file sitting on a desk. And if an Offer in Compromise isn’t the right choice for you then you can work together to come up with the best option that is available. And isn’t coming up with the best solution for you the whole point in the first place?