10 things I learned from speaking to 10,000 people who have tax debt

A small request: Imagine yourself picking up a phone and answering some version of the question, “Can you really help me fix my tax debt?” Now, imagine doing it day after day, for a year, 3 years, 5 years. Some might consider a prison where you’re shackled to a phone forced to do something mundane. My preference is to think about it as a two-way mirror – where I can look into the lives of regular Americans (with their permission) who happen to be dealing with the problem of a tax debt. It’s so darn interesting – let me explain…

This is my attempt to summarize a 16 year career in the tax resolution industry, where as an Enrolled Agent, a licensed tax professional who can represent his clients before the IRS I have spoken to over 10,000 people who have tax debt. I delve into each of these points more deeply in other writing, this piece is an introduction to the genesis of the Tax Debt America Project.

1. Having a tax debt is not uncommon. 

Even though I spoke to so many people, I wasn’t sure about this. I wanted to know more – this knowledge resulted from a little digging. Full disclosure: it happened to me, nearly 20 years ago I had a tax debt also. I’m not sure I’m a standard case but I figured, if the circumstances arranged for me to end up owing the IRS, what are the odds that others will find themselves  in a similar situation?   

Tax debt affects about between 14 million people in the US.   

To put that number in perspective,  According to http://www.alcohol.org, about 15M Americans report living with alcohol abuse disorder. Ironically, I have thought about how tax debt is similar to an addiction.

2. Tax debt affects people from all walks of life.

To give you an idea of how diverse the group that is affected by tax debt – they are rich, poor and in between.  People from every state and some expats too,  every race and religion. Tax debt does not discriminate. I’ve spoken to highschool and college graduates, dropouts from both.  Old people, young people, and those who don’t want to be labeled with either of those tags.  Those who are self-employed people have a higher chance of finding themselves with tax problems for the simple fact that they are responsible for paying their tax – and it’s not so easy to do.

3. Many people are afraid of talking to the IRS.  

Having a tax debt can be scary. Some people are stressed out about debt in general but tax debt is special because of the connection to the government. Hollywood has embellished this perception when fancy houses and cars are seized by the government.  Perhaps what makes things worse are the high-profile tax cases resulting in jail time of people who have captured our attention on TV, movies, and music. Al Capone was convicted on tax evasion not bootlegging liquor. 

Richard Hatch, reality tv show winner of the first “Survivor” won one million dollars but refused to pay tax on it.  Hollywood’s Wesley Snipes, star of the “Blade” series of vampire films among others, served time for tax evasion. Lauryn Hill, rapper with Fugees who became a solo artist, paid thousands in tax and fines after failure to comply with current tax law.  One has to ask, if this is what happens to “the rich and famous” what chance does a normal guy have with the IRS?

4. The IRS isn’t particularly helpful.

Another reason why people are afraid to speak to the IRS is simply because they do not have a good experience and THE IRS ADMITS IT!

“The IRS’s mission is to “[p]rovide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” 

Currently the IRS is struggling on both fronts. Its current inability to meet taxpayers’ customer service needs results in an inability to enforce the law fairly for all taxpayers.” – Bridget Robert, Acting National Taxpayer Advocate, December 31, 2019

Explaining your situation to the IRS should be sufficient to work out your issue with the IRS. Yet, the experience isn’t so straightforward for many people. Frustration levels are high when a taxpayer has to spend a substantial time on hold before reaching an IRS representative. Upon reaching a rep, the experience is negative.  Perhaps the representative isn’t hearing the taxpayer or decides to impose an administrative burden that is not workable. 

5. Most people with tax problems don’t understand their rights.

Owing tax is not a crime. Generally, you can not be jailed for it. There is a formal process to address it. Most people think the only way to address it is to pay.  Speaking with the IRS, and finding they are unhelpful or simply being ignorant of your rights, puts you in a weird information asymmetry meaning  they know more than you do. It is not a fair position to negotiate from and it is uncomfortable.  It’s the same discomfort you feel when trying to apply for a loan to buy a car or home. The car salesperson knows many details about you(and your trade in) and guides you to a decision without you knowing all the factors they consider. 

6. The tax industry isn’t helpful and sometimes, harmful.

In fact, a tax resolution company will often increase the information asymmetry.   How? Misleading advertising that suggests settlements are commonplace. Some advertisements say you settle for 10% of what you owe.  Tax resolution companies also ratchet pressure with fear tactics. Threats that IRS collection actions like the garnishment of wages or the freezing of your bank are imminent especially if you don’t hire them immediately. 

7. Your backstory (how you got into tax trouble) usually doesn’t matter to the IRS

Another misconception about tax debt is that your back story matters. People seem to believe or want to believe if only I tell the IRS, or some company who says they can help how I got into so much trouble – then I can be absolved. In other words, the IRS will forgive my debt because of the hardships I have endured.  In general, none of that matters. There may be some factors that could influence a plan but usually the IRS won’t hear any of it and as a result it won’t be helpful.

For every backstory, there’s only a couple things I listen for which might help the tax debtor. Was a large sum involved, and if yes, what happened to it? What is the timetable? What’s the income history? Are there missing tax returns? Is there some form of administrative relief to be had? 

8a. If the IRS believes you can pay – you will probably repay what they say you owe…

You cannot simply call the IRS and say I cannot pay. I mean you could certainly try it – but the information asymmetry works against you. A common misconception is that the IRS knows everything about you including how much is in your bank account – but that’s not the full story. But, if you file your taxes consistently, the IRS has an idea about your income level, your dependents, your mortgage payment,  savings account balance and may use that information against you.

The IRS also learns that you can pay because you tell them that you can when you call them to make arrangements or beg and plead with them to grant relief.  Callers to the IRS will often volunteer information. Once a taxpayer has successfully proven their identity and the IRS can connect them to their debt. The pressure begins slowly asking if you can pay your tax bill in full, or over the next 30 days or the next 120 days. If you answer that you cannot, often taxpayers volunteer a figure to pay. That figure may be much higher than is required by law but will be the expected monthly payment. If you are self-employed, this strategy almost never works.  

8b. It is possible to demonstrate to the IRS that you cannot pay and therefore qualify for relief.  

However,  you should be familiar with the national, regional and local standards taken into account to determine whether or not you can repay your debt. If you volunteer information that is less than those standards that will hurt your chances for successfully demonstrating to the IRS that you cannot pay. The IRS also takes into account how many people live in your home. In some cases, this may or may not be in one’s best interest to reveal, other times, one may have no choice. In some states, you must share your spouse’s information and that can be used to pay your debt – even if the debt is not theirs! The IRS must also take into account certain expenses which reduce your ability to repay your debt – obligations like child support or alimony, payment of medical bills, student loans or loans made from retirement monies. Nearly 60% of Americans earn less than $50,000 per year – if you have children and car payment – you probably qualify for relief in most counties.

9. Regardless of the resolution strategy you decide upon, fixing the problem normally takes years. 

If you plan to repay the debt, the IRS will allow a tax payer to repay the debt over a period of 5-7 years depending on how much is owed and how much time the government has to collect.  If a relief resolution strategy is pursued, a payment plan can extend longer than 7 years. The IRS may grant relief in the form of Currently Not Collectable (CNC) status but does not discharge a debt – it puts collection actions on hold. Even the Offer in Compromise program, where the IRS accepts a settlement and the rest of the debt is forgiven can take a year or longer to complete, and has requirements for five years post-settlement.

10. Tax debt is often a symptom of other financial problems – which make achieving the American dream much harder to achieve.

After listening to so many of these stories, I began cataloging financial mistakes that people make and I came to realize that tax debt is one symptom of other huge challenges Americans face in trying to reach their version of the American dream.   Taxes are often unpaid because those monies are used for necessities such as childcare, buying a house, healthcare, saving for a child’s higher education and retirement. When a tax debt is resolved, some of those things get short-changed or simply eliminated from one’s life plans. I’ll leave it up to you to imagine what sort of financial nightmare scenarios arise from serious health scare or inability to save for retirement.

If you encountered any of these issues and want to talk about your tax debt, feel free to email me at george.diversiev@thetaxdefenders.com or give me a call at 312-529-5009.  We can talk without any obligation on your part – maybe there’s more to be done, maybe you’re all set.

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