My phone’s been ringing off the hook this week and this seems to be the big question, “I owe the IRS a lot of money, what should I do?”
Although everyone’s situation will be different, here are some general guidelines that might help you muddle through this mess.
1. First, and most important—don’t ignore the IRS. Make sure you contact them, let them know you’re looking for a solution to the problem and keep them informed. Your natural reaction may be to want to hide, but that won’t work. Make them your ally, not your prosecutor.
2. Second—and this is my big issue—do you really owe that much? The reason I ask is because often when people have huge debt, there’s a mistake in the taxes. Not always but quite often. If the IRS did your taxes for you—definitely check that option out. (The IRS doesn’t do taxes very well—no joke.) I cannot tell you how many times I’ve completely cleared someone’s tax debt because their taxes were just done wrong in the first place. More likely, I’ve reduced the debt to a more manageable amount. The point is—getting a second opinion is usually a good idea.
3. Could you afford to make a monthly payment? Generally an installment agreement can be made for up to 6 years, but if you can pay off the debt in two or less that’s so much better. The quick and dirty—if you owe less than $25,000, take that amount and divide by 60. If you can pay that much a month then that’s your installment payment. Remember, if you can pay more than the minimum—do it. Penalties and interest keep adding on while you’re paying so the faster you pay it off, the better off you are.
4. If you owe more than $25,000 or you can’t afford the minimum payment—you’ll need to provide the IRS with financial information to prove your situation. At this point you may want some professional help to get you through the paperwork. If you’re really broke, or unemployed, you might qualify for the currently uncollectable status. It gives you a temporary break from making payments until you get back on your feet. Unfortunately, penalties and interest keep getting added.
5. One option may be an offer in compromise (OIC). That’s where you offer the IRS a smaller amount of your debt –a compromise. Watch out for those late night TV ads selling OICs. Sadly, many of those companies are rip-offs. They charge somewhere between $5000 to $8000 for the OIC but the fine print says “if an offer in compromise can’t be reached we will do an installment agreement.” There’s a formula for doing an OIC—they pretty much know up front if you’ll qualify or not. Paying $8000 for an installment agreement that you could negotiate yourself is a rip-off. Ask lots of questions and get references.
6. Another thing to look at is how old is the debt? Not only are you paying interest, there’s a late payment penalty of 1/2 of 1% per month up to 25%. If the debt is for 2011—well then you’re still paying that extra 1/2% per month—that’s an additional 6% per year on top of the IRS interest rate. You might be better off putting the debt somewhere else. Most credit cards have higher rates than that, but if you’ve got access to cheaper credit elsewhere, that might be worth your while to pay the IRS debt off.
7. Also, if this is only one year of taxes that you owe—then you might be able to have the penalties abated. If you have a couple of years of debt—that’s another story. Don’t ask for the penalty abatement until you’ve got the taxes paid off—otherwise they’ll just start accumulating all over again. But keep that in mind as you get closer to the payoff. A penalty abatement is where you ask them to take the penalties off your debt. Often, if this is the first time you’ve ever owed like this, you can get an “abatement.” That’s the word you want to use.
8. Last but not least, if you got hit with a big tax bill, you need to make some adjustments to your withholding or estimated tax payments so that it doesn’t happen again. Once or twice—okay that happens, but if this is happening every year, that’s just plain irresponsible. If you have an offer in compromise and wind up with another tax debt—it can void the offer making you owe those taxes all over again. It can also terminate your installment agreement. It’s really important to keep current with your taxes.
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.
Here’s the other stuff you’ve got to know:
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.)
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?