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Don't Ignore Tax Payment Problems

By Martin H. Bosworth
ConsumerAffairs.com

June 14, 2005

• Tax Scams Proliferate In April • Mystery Shoppers Find Deceit, Incompetence Among Tax Preparers • Avoid Tax Rebate Direct Deposit Scam • Tax Rebate Goes Only to Those Who File • Instant Tax Refund Always Carries a Price • 'Instant Refund' Loans an Avoidable Expense • Tax Breaks for Family Caregivers • Court Shuts Down 'Warehouse Bank' • Don't Be Fooled By IRS Look-Alike Sites • IRS Warns of Common Income Tax Scams • Poor Americans Missing Billions in Earned-Income Tax Benefits • Complex Laws Make Tax Filing Worse • Paying Taxes With Your Credit Card Can Get Expensive • Senators Push for Electronic Tax Filing • IRS Warns of Tax Scams • Taxtime - Tips for Taxpayers • Don't Overlook Earned Income Tax Credit • Tax Refund Loans "Indefensible" • H&R Block Goofs on Its Own Taxes • Class Action Challenges H&R Block's Electronic Filing Fee • Don't Ignore Tax Payment Problems --- • More about tax preparation ...

For most Americans, taxes are just an inevitable grind to go through once every April. You calculate your total withholdings from your paycheck, fill out the forms on paper or online, send them in, hopefully get a refund, and then relax, until it's time to do it all again next year.

But as the world of investment and finance grows more complex, taxation becomes a year-round concern. Estimated taxes, investment taxes, independent contractor income, taxes on sale of assets, property taxes … the list is, while not endless, considerable.

Inevitably, somewhere along the line, you're going to make a mistake. Whether it's from not filing on time, not withholding enough tax, or making a lot of bad financial decisions that leave you with a big bill, at some point you may be hearing from the IRS, your state tax office, or both that you owe additional taxes.

The normal response to this is panic, and rightly so. Unpaid taxes can lead to stiff penalties and interest, the possibility of garnishing your wages (where the IRS contacts your employer and asks them to deduct a certain amount from your paycheck to pay the taxes you owe), placing levies or liens on your properties or assets (wherein IRS can seize them and collect the value of your property as payment for your delinquent taxes), and so on.

No one relishes the thought of calling the IRS' 1-800 number and dealing with people who have no first names, only ID numbers, and generally aren't able to discuss or handle complex tax questions. It can be a nightmarish experience to try to negotiate with people who are trained solely to get your money as fast as possible.

But panic is not the correct response. You have options, even in the most dire circumstances, that will help get you out of the whole and back on financial track. Here are some of the most basic things to remember:

• Keep paying your taxes on time. If you fall behind on taxes for one year, don't let the next year's taxes fall behind while you rush to cover your debt. The more you become delinquent, the more the IRS and the states have leverage to initiate collection actions against you. Conversely, the more you are seen as being responsible and paying your bills, the more they will be willing to work with you.

• File even if you can't pay. File all your tax returns on time, every time. Both federal and state tax agencies assess stiff penalties for late filings, which can add to your financial burden.

• Negotiate face-to-face. The IRS has tax centers available in every state, where you can sit down for a face-to-face meeting with someone and lay out your case. You always have a better chance of making your plea with a person who's met you and knows your story, as opposed to a random ID number who only sees your info on a screen.

• Consult a professional. Find a reputable tax attorney or accountant in your area and sit down with them. Tell them your situation and don't be afraid to ask questions, no matter how dumb or obvious they may be. Ask around and talk to several financial agents before taking anyone's advice.

• Avoid "Tax Relief" agencies like the plague. ConsumerAffairs.com receives endless complaints from victims of "tax repair" agencies like J.K. Harris who will claim to be able to settle your debt for "pennies on the dollar". More often, they will ask for large sums of money up front, then proceed to disappear for weeks or months, or come back asking for more money before they do anything. The IRS issued a warning in February of 2004 that trying to use tax repair agencies will simply cost consumers valuable money and time.

• Keep records of every expense, transaction, or deduction. If you have to negotiate, the more paperwork you can bring to bear in your favor, the more chance you have of getting a good settlement.

• Know your rights. Do not let yourself be bullied or intimidated. Tax agencies are basically collection agencies, and they want your money. If you stand up for yourself and know what you can and cannot commit to, you have a much better chance of gaining good results. The Office of the Taxpayer Advocate is the IRS' "negotiation" arm for Americans who have serious tax burdens and can't get them resolved through regular means. Working with the Advocate's office can often get penalties on a tax debt abated or reversed, or a mistaken tax claim negated entirely.

What To Do

So what are your options if you're negotiating? What can you do to pay back the debt?

• Consider a loan, either from a commercial lender or from family and friends. Like any debt, paying as much as you can as often as possible will help keep the wolves at bay. If you have any investments that aren't doing anything, sell them. If you sell at a loss, you've just earned a deduction for next year's return. Shop around for a bank or credit union that will give you a fair rate. You can also pay with your credit card if you must, but be careful! The interest rates on credit card debt can exceed even those charged by the IRS.

• Set up an installment agreement. For a $43 fee, the IRS will set you up on a monthly payment plan that allows you to pay back your debt in regular installments, much like any other loan. The penalties and interest will continue to accrue as you pay, but if you can demonstrate that you have worked with the IRS or the state in good faith, or were misled by an employee, you can appeal to have the penalties abated or reversed when the balance is paid. In some cases, you can even have them waived if your case is strong enough. Keep in mind that any future tax refunds you get will be applied to your unpaid tax balance.

• Submit an Offer in Compromise. If even an installment agreement would place too much of a burden on you, or you had extraordinary circumstances that caused you to owe taxes, you may be eligible for an Offer in Compromise (OIC). An OIC allows you to settle your debt with the IRS (and many states) for less than the total sum, if you can provide an up-front offer, or set up a payment plan for a specified period of time, without penalties or interest.

The OIC requires you to fill out a financial summary form (Form 433-A for the IRS, and individual forms for states) and provide extensive records to substantiate your claim. The Federal OIC program also has a $150 upfront fee to submit the offer, which you don't get back even if the offer is rejected. If your claim is based on doubt of liability (You may not owe these taxes), or the $150 fee will put you in financial difficulty, you can apply to have it waived.

OIC's can process at very different rates, depending on your circumstances and the complexity of the case. You can download the financial statement form and the IRS OIC form (Form 656) from the IRS Web site, but definitely take it to a professional tax agent or accountant to look over before committing. Many "tax repair agencies" lure unsuspecting victims in by claiming that they can submit the forms for them. Don't listen! You can do all the paperwork and submission yourself, but it's best to get tips from an enrolled tax professional.

• File for bankruptcy. This is the most dire choice, and given the recent changes to the bankruptcy laws (as detailed in ConsumerAffairs.com's special report), much more difficult than it used to be. There are very specific and stringent laws regarding using bankruptcy to cover tax debt, so before you consider filing, talk to your attorney or tax professional to see if you qualify.

Tax debt can be terrifying, no doubt about it. But like any other debt, if you're smart, play your cards right, and pay back as much as you can, you'll get to the other end of the tunnel. Whatever else you do, don't panic! Keep a cool head and you'll be back on your feet much more quickly than you might expect.

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