However, it is advisable to pay off your tax debt before it adversely affects your financial situation. If you default on your payments, then you can enroll in a debt management program to eliminate your financial woes. If you’re unable to eliminate your tax debt after enrolling in a best debt management program, then consider the following options.
Opt for IRS OIC: The IRS Offer in Compromise can help you eliminate your debts with ease. However, a successful OIC can be really complicated. Unfortunately, only a few people qualify for the Offer in Compromise. You can be eligible for OIC if you undergo financial hardship. However, the taxpayers are required to provide evidence that they’re unable to repay the debt within the remaining time the IRS has to collect on the debt. You can proof your financial hardship by analyzing your household income, monthly IRS allowable living expenses, and the assets in your name.
IRS Installment Agreement- Another great option: You can consider installment payment if you fail to qualify for an OIC. If you opt for an Installment Agreement option, then your repayment plan is stretched over a period of 5 years. This can be a beneficial option when you can pay off your debts in full. If your owed amount exceeds $25,000, then the IRS may not offer the option of paying the debt within five years. The IRS can employ strict action to collect the debt if the owed amount exceeds $25,000.
Currently Not Collectible status- Can it save you?
Therefore, you need to keep the above mentioned options in mind when you’re planning to eliminate your tax debt to regain financial independence.
Filed under: Debt Resolution, IRS Debts, Tax Debt, Uncategorized
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.
Filed under: Debt, Debt Resolution, IRS Debts, Unemployment
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.
- 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.
- 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.
- 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.
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:
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.
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?
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?