Posted on September 7, 2015May 31, 2016 by Jan Roberg

How to Settle Your IRS Debt for Less: Taking the First Step

You’ve heard those commercials on the radio or seen them on late night television. “Settle your debt with the IRS for pennies on the dollar!” Those companies charge a lot of money for something called an “Offer in Compromise.” I’ve dealt with a lot of people who’ve paid between $5,000 and $8,000 for those services and gotten nothing-NOTHING for their money. That’s good money they could have used to pay off their debt!

So, before you spend that kind of money, you should see if you have a fighting chance at getting an Offer in Compromise (OIC) first. And here’s the best part–you can test it out for free. FREE!

The IRS has an Offer in Compromise Pre-Qualifier. It’s a wonderful little tool that will let you know if you even have a shot at an OIC before you spend money trying to get one. Here’s the link: IRS Offer In Compromise Pre-Qualifier

The first page has some pretty basic questions. Are you currently filing for bankruptcy? The answer has to be no, you can’t have an OIC if you’re in bankruptcy. If you’re in bankruptcy, you’ll have to wait until that’s over to file for an OIC. The next question is have you filed all of your tax returns. You have to say yes–otherwise the result will be no OIC. You’ll have to file those returns before filing for OIC, but you’re just trying to figure out if you could qualify in the first place.

Same thing with making your tax payments. Before you file for OIC, you’ll have to have your estimated payments caught up for the current year and self employed people must have their payroll deposits made.

So, just to get past the first page, you need to answer NO, YES, NA, NA. If that’s not true, you’ll need to rectify the situation, but you need to answer that way just to get past that screen to get to the meat of the program.

The next page is about where you live and the amount of tax that you owe. (This is one good reason why you need to file all of your returns before you make an offer–how can you settle your debt when you don’t know how much you owe?) But this is just a pre-qualifier, it’s to see if you may be able to make an offer so make your best guess.

The reason they ask about where you live is because the cost of living is different in different areas. A New Yorker will be able to claim more in housing expenses than someone from St. Louis because the cost of living is higher there. On the flip side, New Yorkers don’t get an adjustment for their other expenses which can hurt them when trying to qualify for an OIC. But that’s why the question about where you live is on the pre-qualifier.

This page also asks about your age. If you’re over 65, they make a higher allowance for your out of pocket medical expenses. That’s why that question is there.

From there, on the next page the IRS is looking at your equity–what are you worth financially? How much money do you have in the bank? What’s the value of your home? How big is the loan on it? How much is in your 401(k)? Do you have any stocks? How about the value of your car? How much do you still owe on your car loan? So where it asks for the equity in your car, it means what is the value right now minus how much you still owe on your car loan, that’s your car equity.

Home owners with a lot of equity and people with retirement assets often lose out right here. If you have assets, the IRS figures you can sell them or cash them in to pay your IRS debt. Be honest when filling this out (remember, no one is going to see it but you.) If you apply for an OIC, the IRS will be able to substantiate everything you say, so you may as well tell the truth to yourself on the pre-qualifier.

If your assets are too high to qualify for an OIC, the pre-qualifer will stop right here. You may want to double check your figures before giving up completely, but most likely you’ll need to pursue a different route to get settled with the IRS.

If you do get to the next section it’s all about your income. Wages, interest, dividends, child support, alimony, distributions from partnerships and S corporations. Anything else? The IRS doesn’t care if it’s taxable income or not. They include social security, pension income and even Veterans benefits as being money that you can use to pay your tax debt with.

The IRS is looking for monthly figures here. So, let’s say you get paid every two weeks. That means 26 paychecks a year. You’ll take the gross on your pay stub multiply that by 26, and divide by 12 to get your monthly pay. Lots of people would just double their pay check, because for the most part, you’re getting 2 checks a month. But the IRS doesn’t count that it way. They multiply by 26 and divide by 12 it makes a difference. You need to know how they’re calculating if you want to win this game.

The next page is all about your expenses. How much is your rent or mortgage? How much do you pay on your cars? What do you spend on gas and groceries? Child care? Child support? Alimony? Utilties?

Life insurance is on the list too. Now what they mean here is term life insurance. A whole life policy where it’s like an investment isn’t considered to be a cost of living expense, but term life is.

So now you’ve input your income, your expenses, your debt and your equity and the IRS computer runs all these numbers together and either says you may or may not qualify for an Offer in Compromise. It will also say what the IRS expects your offer to be given the information you put in.

Here’s the thing: the IRS tool is only as good as the information you put in. Most people do the IRS Pre-Qualifier the first time around just guessing at the answers. (I think I’d get this much if I sold my house today, I’m guessing my loan balance is about $x.xx.) This is just to get a ballpark. To get a better picture, you’re going to want to really know what your home loan balance is. Check out the fair market value of your house on Zillow.com. Really look at what you spend for your utilities. Get the actual numbers off your pay stub and do the pre-qualifier again with the actual figures.

Does it still look like you can do this? Great. Remember, page one? Make sure all of your returns are filed first and you know how much debt you owe. Don’t be in bankruptcy. And most importantly, make sure that if you need to be making estimated tax payments, you’re caught up with making them. Make sure these issues are taken care of before you submit an actual offer. I suggest hiring a professional to do this, but if you’re going to do it yourself, start with the Offer in Compromise Booklet, here’s the link to that: Offer in Compromise Booklet

And if you don’t qualify for an Offer in Compromise? That’s still not the end of the world. If you have exceptional circumstances, like huge medical expenses, you may still be able to make an OIC. Be aware that your chances are significantly lower for getting accepted, but you can still make the offer. But you’re going to have to demonstrate that your circumstances are exceptional and that paying the tax would create an undue hardship. This seems silly, but I cannot stress this enough–simply not wanting to pay your tax is not considered an undue hardship. (I get asked that question all the time.) Paying for chemotherapy treatment for a cancer patient, that might get you somewhere.

Even if you cannot qualify for an OIC, you can still work out a payment arrangement with the IRS to get the debt handled. You’re just going to have to pay the full amount of your debt.

If you have the time, please answer a question about this blog post. The following link will take you to my little two question survey. Thanks. Survey

Posted on October 9, 2012May 31, 2016 by Jan Roberg

What to Do if You Owe the IRS Lots of Money

Photo by splorp on Flickr.com

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.

Posted on April 24, 2012May 31, 2016 by Jan Roberg

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.

Posted on April 13, 2012January 13, 2017 by Jan Roberg

How to Negotiate Your Own Payment Agreement With the IRS

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.

Posted on April 10, 2012May 31, 2016 by Jan Roberg

I Lost My Job and Can’t Pay the IRS

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 15^th.
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 17^th. You really don’t want to give the IRS any more money that you have to, do you?