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.