Tax Group o Unable to Pay the IRS? A GUIDE TO GETTING OUT OF TAX TROUBLE o A Defense Tax guide to tackling your tax debt problems with the IRS, whether your first un-payable tax bill or after the IRS taking punitive tax measures
Who’s this guide for? If you’ve deliberately taken measures to avoid tax through illegal means, this guide is not for you. You’re probably online right now because you have had a letter from the IRS that you’re struggling to deal with. It might be the tax bill itself, which by every calculation you try you can’t argue with yet have no idea how to pay off. You may have already had that letter and stuck your head in the sand like an ostrich, and are now being told that you are subject to a wage garnishment,bank levy or other punitive measures. You could be receiving those measures now. Don’t worry! In reading this guide, we at Defense Tax will show you what to do at the different stages of your battles with the taxman. In Part 1 we will deal with the easiest situation - how to respond to a tax bill you cannot afford. In Part 2 we will deal with what to do further down the line when punitive measures have been threatened or are in place already. In Part 3 we will discuss the advantages of getting a tax attorney on board. One thing to remember from the start is that the IRS is always nicer to people who are upfront and honest with them. They aren’t going to be gentle - their business is funding the federal government after all - but as long as you are trying to deal with your problems they will try to accommodate you. On the other hand if you do try to run or hide they can be very tough indeed with powers ranging from taking money direct from your employer in a wage garnishment right up to seizing your home and business. With these powers it really does pay to talk to the IRS from the outset as no matter how unpleasant an un-payable tax bill is, it is far better to tackle the problem head on.
Part One - receiving the IRS tax demand When you receive the first IRS tax bill, this is the best time for you to go to the IRS to say that you cannot afford to pay it. In this section we will look at what they will want from you and how you should deal with them. Before you get on the phone or go online to the IRS you need to be prepared to tell the IRS exactly what they need to hear as otherwise dealing with them could get very confusing and you could end up getting in more trouble than you started with. There are three broad routes to recovering from a tax debt with the IRS - the installment plan, the offer in compromise, and bankruptcy. Where more than 800,000 people and businesses have so far been accepted onto an installment plan, the offer in compromise is far harder to achieve.
Here are some things to consider: A re you up to date with your tax returns? If you have any missing years tax returns then you should file them immediately. You don’t want the IRS to start picking your affairs apart in a tax audit. Essentially this move ensures that they have as little room to maneuver as possible when you go to tackle your problem. A Have you included all your allowable expenses in your tax return? Did you know state and other taxes are included as allowable expenses, as are child support payments, and federal student loans (if paid monthly)? Legal expenses are also covered - perhaps payments to a tax attorney. Have a look at the IRS 2019 Tax Withholding Calculator to see if you have deducted everything you are legally able to from your tax bill. You never know - you may have missed out on a big allowable expense and be able to tell the IRS you missed it out. This could reduce the amount you repay significantly. Credit card debts are not considered as allowable expenses. llowable expenses
Repayment in 120 days or fewer If you can pay your bill in 120 days or fewer this is probably the best outcome. The IRS isn’t likely to want a statement of accounts or to audit you. If you cannot afford that then you should consider a Fresh Start repayment over 120 days or more - we will deal with that in the next subsection. How much can you afford to repay? The IRS offers two repayment plans - the short term repayment plan of more than 120 days and the short term repayment plan of fewer than 120 days. The short term repayment plan is available to someone who has a tax debt of $100,000 or less, while the long term repayment plan is available to those who owe a tax bill of $50,000 or less. If you have a $50,000 tax bill on a short term repayment plan that would mean repayments of more than $16,666 a month. If this is still too steep, you still don’t have to worry as the IRS runs the Fresh Start initiative. Can you do all of this online? It is cheaper to go through the whole process online - unless you are calling for a longer repayment plan or an Offer In Compromise then the IRS may make added charges for going through the process on the phone. Cost? The IRS has a list of fees and interest charges for installment plans on its website here. Click Here
Repayment in 120 days or more Remember, no matter how pleasant they might be on the phone the IRS is not your friend. If you want to repay your tax debt in more than 120 days you will see more bureaucracy as you prove that you can in no way make that repayment in other ways. The good bit: Fresh Start installment agreement Installment agreements are the commonest type of agreement that you end up in with the IRS. You can end up paying less than the original sum thanks to the statute of limitations on the amount of time the IRS is allowed to collect your debt. There are five types of installment agreements under Fresh Start: 1. The Guaranteed installment agreement allows you to clear a $10,000 tax debt in three years or fewer. 2. If you owe $50,000 or less then you can pay this within five years 3. Under a Partial Installment Agreement you can agree to repay your tax debt until the statute of limitations prevents the IRS from collecting any more money from you. 4. If you are a business you can agree to repay up to $25,000 in less than two years 5. If you owe more than $50,000 you can negotiate a repayment plan under the Fresh Start initiative. You should be aware that you will have to give a full statement of accounts to the IRS should you start this program. The difficult bit - statement of accounts Where you cannot make the payments in 120 days or fewer you may be required to file a full statement of income and expenditure so the IRS is confident that you can make those payments. This isn’t just a pleasant statement of affordability - they will look at allowable and non-allowable expenses in your statement and may make demands you tighten your financial belt even more to make greater payments.
Offer in Compromise Everyone loves the idea of paying a lot less tax than they were originally billed for! The IRS doesn’t offer in compromise very lightly as if they did the Department of the Treasury would be completely broke! There are three situations where the IRS can offer a compromise on your tax debt: Doubt as to liability. This is where there is a doubt as to how much you should really repay the IRS. One example is where you can prove they disallowed an allowable expense. If this is significant and they cannot disprove your claim then you may have either that amount taken from your bill or the whole tax bill waived. Doubt as to collectability. This is where the IRS, having studied your accounts and projected income, cannot see how you would be able to make your tax debt repayments within a reasonable timeframe. You may have lost your job or had health problems that prevent you from earning anything like you did in the previous tax year. Excessive hardship. This is similar to the case above, but is essentially where they see that your allowable expenses + a tax debt repayment would cause you undue hardship. This again might be for someone who has had a big fall from financial grace due to health problems or another unavoidable position where they can reasonably agree that you will not be able to meet the tax demand. This is where someone might not make home rent payments - not a snowbird who can’t afford their Fort Lauderdale property mortgage! If you think meet one of these strict criteria then you should apply online or take on a tax advisor to apply. The good news is you could pay a tiny fraction (5% or less in some circumstances) of the overall tax burden. The bad news is the bureaucracy. Clean up your tax affairs before you apply You can be refused an offer in compromise if you have missed a tax return. Before you apply for the offer, make sure you have done this. You may have filed your tax returns but failed to pay the tax debt on a previous year - this is another reason for the IRS to refuse to negotiate with you. In live bankruptcy proceedings? Again, forget about the compromise agreement.
Tax rebate? Forget it! A final point to note is that if you are owed any monies by the IRS in the form of a tax rebate this will be written off as part of the agreement to go into the offer by them. This is not a walk in the park and should not be taken lightly. When you are absolutely sure you can convince the IRS to come to the table to talk turkey, only then should you take your first steps toward an offer in compromise. It may at this stage mean talking to a tax advisor about your situation. Offer in Compromise The IRS website has a simple explanation as to how to apply for an offer in compromise here. It centers on the Form 656 If you are a business applying for an offer in compromise then you will be liable for a $186 upfront fee. If you are an individual on a low income (that is measured as your total monthly income being at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services) the offer in compromise fee will be waived. Also, if the offer is due to a tax liability dispute the fee will also be waived. Click Here Click Here Appeals process After the several months (or even longer) of consideration and negotiation with the IRS you may be refused. You can appeal the decision but you should be aware that this is a legal and bureaucratic process and without legal advice and support you may fail in the appeal. The man who represents himself in court has a fool for a lawyer!
Bankruptcy Bankruptcy really is your last resort financially and in most cases the IRS debt can not be including in your bankruptcy. In some rare instances as long as you cooperate with the IRS you can in the end avoid some of your federal and state tax burden. We will focus on the commonest form of bankruptcy here - Chapter 13. This is for individuals and the self-employed. Other forms exist, and the IRS can point you to them via this page. Click Here Tax returns Bankruptcy really is your last resort financially but as long as you cooperate with the IRS you can in the end avoid some of your federal and state tax burden. We will focus on the commonest form of bankruptcy here - Chapter 13. This is for individuals and the self-employed. Other forms exist, and the IRS can point you to them via this page. Regular income You cannot get support from the IRS for a Chapter 13 bankruptcy if you do not have a regular income. Tax refunds Unlike offer in compromise or longer installment payment plans, you can get tax refunds. The IRS leaven this by stating, “However, refunds may be subject to delay or used to pay down your tax debts. If you believe your refund has been delayed or offset against your tax debts you can check on its status by going to our Where’s or by contacting the IRS’ Centralized Insolvency Operations Unit at 1-800-973-0424.” On Discharge You may be entitled to have certain federal taxes waived on the bankruptcy’s discharge. What these are will be negotiated during your bankruptcy hearing. My Refund tool
Part 2: When punitive action has been enacted or threatened In Part 1 we went through the ideal process where as soon as you saw you couldn’t pay the tax debt in your initial tax demand you held up your hands, told the IRS you couldn’t repay and took every step you could to come to an agreement. Not everyone does that! The good news is that even when punitive measures are being threatened or auctioned the IRS is still willing to talk. Think of that letter notifying you of a wage garnishment, bank levy or collection proceedings as having a final line saying, “However, if you talk to us and try to straighten things out we might be nicer to you!” The actions the IRS take are expensive and really are only for the most delinquent of tax debts. At every stage you can get them to come to an agreement. It pays to do this as early as possible or they could end up breaking you financially and even making you homeless. Due process The first thing you will have had from the IRS is your tax bill. As indicated in Part 1 above you should respond then. The next stage is a notice of intent from the IRS. Whatever the IRS chooses to do to you, it will usually send you a letter giving you 30 days notice of its actions. This means that you have 30 days in which to get your house in order and to face your problems. If you do not do as the letters demand and either try to run or hide from the problem then you really are in trouble! You can back out of the punitive action at any time by facing it down. Isn’t it better to respond before things get nasty? Wage garnishment This is a process where the IRS can force your employer to repay a significant sum of your income. It could hit 50% or more of your income - the wage garnishment is designed to be punitive and is only considered as a means to bring you to the table. If you offer an installment plan or ask for an offer in compromise then the monthly cost could fall considerably.
One point to note - you cannot tell your employer to stop paying the garnishment as they could face serious consequences from the IRS themselves. Bank levy The IRS can take all your money from a bank account it knows about, prevent you from taking any money out, and continue taking all income that goes into the account. By talking to the IRS you can stop this. Tax lien The IRS can take all your money from a bank account it knows about, prevent you from taking any money out, and continue taking all income that goes into the account. By talking to the IRS you can stop this. Property seizure While the car loan ‘repo man’ can only take your car back if you fail to make repayments, with regard taxes all your property is ‘secured’ against your back taxes. Your car can go and you will have to repay your car loan even after it has been seized. The IRS even has the power to take your home and business from you. Isn’t it better to just make contact with the IRS to come to an agreement? Passport and driving license seizure The IRS has an agreement with the State Department where your passport can be annulled and you are prevented from travel. You might be believed to be at risk of leaving the country to avoid paying your taxes in this instance. Interestingly, the government has agreements with a number of countries around the world where you can be extradited back to the US for a number of crimes including tax evasion. A number of states have laws where for state and federal tax defaults they can annul your driving license. As with passport seizure it can stop you from earning the money you need to make those tax repayments.
Part 3: Time to get tax debt advice? Resolving your tax debt really isn’t that easy is it? We hope we have helped you think this whole process through in some way. You could walk away with no worries at all from simply paying off your tax debt to the IRS in just a few months, or you could end up in protracted and detailed negotiations to reduce your tax debt. The fact is, the IRS will deal with you as if you know what you are doing, whether or not you actually do. Using loose language on the phone or in a letter to them could result in them jumping you like a pack of hungry dogs. While applying for a simple 2-3 installment repayment plan can be fairly easy, the more complicated your financial problems are the harder it will be to communicate them to the IRS agent. At Defense Tax we have a team of advisors and a tax attorney who can listen to you and look at your tax debt with you. You can use that loose language that the IRS agent wouldn’t forgive and we can help you communicate your issues in tight, exact language to explain your problems to the IRS. We can answer their questions exactly as they should be answered, and with our expertise can even considerably reduce the amount of money that you eventually have to repay the IRS. If you are receiving punitive action from the IRS then it probably makes even more sense to get in touch with Defense Tax as we can help you get those measures stopped and things like tax liens and wage garnishments removed. Our fees could be a lot less than the amount of money we save on your tax bill at the end of the dispute with the IRS so we can end up more than earning ourselves the fee you pay! Get in touch today to discuss your tax debt with us.