For any IRS workers or accounting lurkers here
April 19, 2016 1:44 PM Subscribe
I was lightly whining about the pain of sending in my first quarter taxes yesterday. A Facebook acquaintance stated (paraphrasing) that not only can he not afford his back taxes from last year due to not paying his pre-paid amounts, but he can't afford the new first, second, third or fourth quarter payments either.
Yes, I know the IRS is gentle about setting up payment plans. But what happens in my hopeless Facebook friend's case? What about the concept of not trying to squeeze blood from a stone?
and yes, I have read over this thread
Yes, I know the IRS is gentle about setting up payment plans. But what happens in my hopeless Facebook friend's case? What about the concept of not trying to squeeze blood from a stone?
and yes, I have read over this thread
Several years ago I ended up where I was behind a couple grand to the IRS, and tried making payments but couldn't keep up.
First step is repeated stern letters and bills saying how much I owed;
Then they took my next year's tax refund and applied it to the balance. I believe there was also a mechanism to collect my state tax refund as well.
THEN they sent a letter to my bank to garnish my bank account, in the amount of the remaining balance. This would have involved a hold on my bank account for the balance owed, or the entire balance of the account, whichever was smaller.
The next step was to garnish my paycheck, but I scraped enough to pay the remaining balance before the garnishment happened on the bank account, so I don't know what was going to happen next.
posted by AzraelBrown at 2:05 PM on April 19, 2016
First step is repeated stern letters and bills saying how much I owed;
Then they took my next year's tax refund and applied it to the balance. I believe there was also a mechanism to collect my state tax refund as well.
THEN they sent a letter to my bank to garnish my bank account, in the amount of the remaining balance. This would have involved a hold on my bank account for the balance owed, or the entire balance of the account, whichever was smaller.
The next step was to garnish my paycheck, but I scraped enough to pay the remaining balance before the garnishment happened on the bank account, so I don't know what was going to happen next.
posted by AzraelBrown at 2:05 PM on April 19, 2016
The IRS is actually great to work with if you stay in contact with them - it's ignoring the letters and whatnot that causes problems. Have him grab the latest letter he received, call them, and set up a payment plan -- I've seen it as low as $25/month. If that isn't feasible right now, then he can at least get them to cease collection efforts. If this is only for 2015, he might be able to do a 120 day full payment agreement and avoid the setup fee.
If he has a state or local tax liability, he'll need to work with them separately.
Once he has made these calls, his next priority should be getting current for 2016. Think of it like triaging an emergency situation - you get the patient breathing and with a pulse (contact IRS to halt collection efforts), then you work on stopping the bleeding (current year tax liability). If he can't pay his 2016 liability, the cycle continues. He'll have to look at the specific numbers for his situation, but usually it makes sense to allocate funds to the current year liability over the prior year liability (so, if he can't pay both, e.g., 2014 and 2016, it it probably better to pay 2016 and limit the "bleeding" to past tax years and have a clean slate going forward).
If he hasn't filed his 2015 return yet (or an extension) please tell him to do so ASAP! Filing without paying is better than not filing and not paying. Note: an extension of time to file is not an extension of time to pay.
So:
-file 2015 return if he hasn't yet
-call IRS and maybe also state tax agencies
-set up payment plan - be realistic about ability to pay, don't commit to a plan that won't actually be feasible
-if he's a freelancer, set aside 30ish% of each sale for tax payments and remit 2016 quarterly payments on time; if he's an employee, adjust withholdings so that enough is withheld for 2016
-file and pay 2016 liability on time
-work on paying off earlier years; stay in contact with the tax agencies; don't ignore letters -- almost every single income tax collection effort from the IRS can be at least temporarily postponed with a phone call.
-if paying off the past liability still isn't working out, look into doing an offer in compromise
posted by melissasaurus at 2:34 PM on April 19, 2016 [8 favorites]
If he has a state or local tax liability, he'll need to work with them separately.
Once he has made these calls, his next priority should be getting current for 2016. Think of it like triaging an emergency situation - you get the patient breathing and with a pulse (contact IRS to halt collection efforts), then you work on stopping the bleeding (current year tax liability). If he can't pay his 2016 liability, the cycle continues. He'll have to look at the specific numbers for his situation, but usually it makes sense to allocate funds to the current year liability over the prior year liability (so, if he can't pay both, e.g., 2014 and 2016, it it probably better to pay 2016 and limit the "bleeding" to past tax years and have a clean slate going forward).
If he hasn't filed his 2015 return yet (or an extension) please tell him to do so ASAP! Filing without paying is better than not filing and not paying. Note: an extension of time to file is not an extension of time to pay.
So:
-file 2015 return if he hasn't yet
-call IRS and maybe also state tax agencies
-set up payment plan - be realistic about ability to pay, don't commit to a plan that won't actually be feasible
-if he's a freelancer, set aside 30ish% of each sale for tax payments and remit 2016 quarterly payments on time; if he's an employee, adjust withholdings so that enough is withheld for 2016
-file and pay 2016 liability on time
-work on paying off earlier years; stay in contact with the tax agencies; don't ignore letters -- almost every single income tax collection effort from the IRS can be at least temporarily postponed with a phone call.
-if paying off the past liability still isn't working out, look into doing an offer in compromise
posted by melissasaurus at 2:34 PM on April 19, 2016 [8 favorites]
not trying to squeeze blood from a stone
If he owed tax last year and he has estimated payments for this year and nothing big has changed, your friend is not broke. Your friend is making taxable income and not budgeting to actually pay tax on that income. If you "can't afford it" because you've spent all that money on other stuff, at some point, that isn't really the IRS's problem. The whole reason we have withholding taxes and estimates is because people have a tendency to do this; if it's not withheld or paid immediately, people will spend it on other stuff.
So they'll work with you to a point, but if you've got stuff and yet you can't find the cash to pay the IRS, at some point you're going to have to give the stuff up to make those payments. The sort of people who can't even manage a payment plan are usually the ones who've become disabled or gone through other major hardships where they don't at least have ongoing big tax liability. People who have ongoing tax liability but can't make the payments have budgeting problems and are living beyond their means... but a lot of those people blame the taxes before they blame their own budgets.
posted by Sequence at 5:10 PM on April 19, 2016 [5 favorites]
If he owed tax last year and he has estimated payments for this year and nothing big has changed, your friend is not broke. Your friend is making taxable income and not budgeting to actually pay tax on that income. If you "can't afford it" because you've spent all that money on other stuff, at some point, that isn't really the IRS's problem. The whole reason we have withholding taxes and estimates is because people have a tendency to do this; if it's not withheld or paid immediately, people will spend it on other stuff.
So they'll work with you to a point, but if you've got stuff and yet you can't find the cash to pay the IRS, at some point you're going to have to give the stuff up to make those payments. The sort of people who can't even manage a payment plan are usually the ones who've become disabled or gone through other major hardships where they don't at least have ongoing big tax liability. People who have ongoing tax liability but can't make the payments have budgeting problems and are living beyond their means... but a lot of those people blame the taxes before they blame their own budgets.
posted by Sequence at 5:10 PM on April 19, 2016 [5 favorites]
For what it's worth, if you're filing quarterly because you're doing 1099 work, and you do a lot of it, you should work with an accountant to make sure you have the most tax efficient business structure and also to ensure that you're taking maximum advantage of the unique retirement accounts available to you. It's honestly kind of amazing how much money you can save doing this. Chances are you won't need to file quarterly anymore, once you get that set up.
posted by feloniousmonk at 7:34 PM on April 19, 2016
posted by feloniousmonk at 7:34 PM on April 19, 2016
The estimated taxes last year along with this year are a big red flag that your friend is simply not doing the self-withholding (and paying that as estimated taxes) that is necessary. This is a common problem for the self-employed who see all that money rolling in without any withholding, and are used to simply being able to spend the entirety of a check that was deposited in their bank by an employer's payroll. Sadly, for the self-employed, not only do we have to manage withholding, but it usually has to be at a higher rate that accounts for self-employment tax, and those of us who wish to remain healthy and modestly wealthy into our retirement are also funding things like health insurance, Roth and SEP IRA's, etc., all "off the top" before we see one cent of business profit as personal income.
As others have said, if he's clearly making money and he can't pay the IRS, then that is simply a matter of your friend living beyond his means.
posted by jgreco at 1:23 AM on April 20, 2016
As others have said, if he's clearly making money and he can't pay the IRS, then that is simply a matter of your friend living beyond his means.
posted by jgreco at 1:23 AM on April 20, 2016
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posted by xyzzy at 2:01 PM on April 19, 2016 [1 favorite]