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.