Are you one of the millions of folks in America in debt? Owe your credit cards more than three months’ income? Behind on other bills and loans? Do you owe the IRS back taxes? Maybe you figured the stock market would bail you out? Ouch! Forgive me for mentioning it.
First of all, realize that the IRS should be the last organization you want to owe anything to. They have powers that others lack. Generally, other creditors have to go to court and get a judgement against you. Only then can they go after your assets or income. This takes time, and you can show up in court and argue or get a postponement. The IRS is empowered without going to court. They have serious, powerful weapons. They have liens and levies.
A lien is a public notice to anyone who inquires that you owe a creditor. When you owe the IRS, they could file a lien in the county that is the last known address that they have for you. Anyone doing a credit check will discover that lien. Since the IRS lien usually moves to the front of the line and other creditors behind it when it comes to a pay-off, your credit rating will be hurt. Creditors will know that the IRS has first dibs. This will hurt you if you try to buy or sell real estate. An IRS lien means the IRS must get paid before you get anything in the sale. And the IRS could file a lien for a tax year, even if you didn’t file a tax return. They could estimate your taxes for that year and declare you owe, say, $30,000 based on information they have. It’s up to you to file and show you owe less. You’re guilty until proven innocent.
A levy is even worse. A levy is filed with any institution that the IRS thinks might give you money in the future. This includes anywhere you maintain an investment account: banks, brokerages, mutual funds etc. The bank, for example, receiving a levy from the IRS, must freeze your account until the levy is lifted by the IRS. If it’s your checking account, you might be bouncing checks all over town before you are aware of what’s going on, again ruining your credit. They can also instruct your boss to hold back most of your paycheck and send it to them. No one likes their boss to know they have these problems. And these events always seem to occur at the worst time in your life, adding more fuel to aggravate you. You’ll wind up using swear words you swore you’d never use.
So the best advice is not to owe the IRS. But you say you’ve just done your taxes. You do remember those gigs where the employer treated you as an independent contractor and no tax was withheld. Not even social security and Medicare. You didn’t give it much thought at the time. You were glad nothing was withheld. It felt good to go to those upscale restaurants now and then. And you say you now discover you owe amounts that you never dreamed possible? Can income taxes be that much? There must be some mistake. You heard something about making estimated payments, but you thought that was just for the very rich living on dividends and interest. You say you went ahead and spent everything you made on one thing or another and can’t see how you’re going to pay the tax bill? You say you’re broke, busted, financially running on empty? Here are some options
Don’t do anything. It will be several years before the IRS will catch up with you, and you can file and pay them then. By then, you’ll be singing all over the place. After all, didn’t that agent say you had potential? Just work out the passagio? Ignoring the IRS is the worst choice, but unfortunately lots of people make it. They wind up not paying, or even filing, for several years, and they owe so much that when the IRS comes calling, they go into panic mode. This really can be bad for your physical health as well as your pocketbook. In the long run, it will cost more, because interest and penalties will be added on. These can easily run about 40 percent of the tax owed the first year and 20 percent every year thereafter, depending on the current interest rates. By the end of year two, every $1,000.00 you owed in tax just bumped up to around $1600.00. And there are other penalties the IRS can impose that I didn’t even mention. Please don’t choose this option. None of the interest or penalty charges are tax deductible, by the way.
If you own your own home, take out a home-equity loan and use it to pay off the IRS. You will get them off of your back, and the loan is tax deductible. These loans can give you many years to pay them off.
If you own your own home, consider refinancing your mortgage. If your home’s value has risen, you can “cash out” some of the equity to pay off the IRS. You may also get a lower interest rate and get rid of the higher old mortgage rate and any PMI. Those paying PMI know well what this is. The interest here is also tax deductible.
Pay the IRS off with a credit card loan. Those with good credit usually get offers to open new cards at low introductory rates. These rates will generally be lower then the IRS late charges, and I’d rather owe MasterCard than the IRS any day.
Apply for an installment agreement with the IRS. By filling out a form and showing your income and assets won’t allow you to pay it all now, you can work out a payment arrangement.
Look into Offer-In-Compromise. This is a program the IRS has which allows you, if you qualify, to have some or all of your tax bill reduced because the IRS can see you’ll never be able to pay it off in your current situation. This is a complicated process. Perhaps I’ll cover it in a later column.
File for bankruptcy. There are circumstances where IRS debt can be discharged (removed forever) in bankruptcy. You must first give the IRS two or three years to collect, depending on the year you are filing the 1040. Of course, bankruptcy kills your credit. Again, this is a complicated topic for another space.
There is help for those who get in over their heads. The Consumer Credit Counseling Service, 888-577-2227, www.cccs.org, is a nonprofit community organization that provides free debt consolidation and management advice.
