Sometimes when people who are looking for help with their tax debt call me, they simply want a few questions answered.
What is the Fresh Start Initiative?
How can I get this federal tax lien off of my credit report?
Harold Johnson was one of these people. At my company, we do screen our callers before they speak with a tax professional like me, so I had an adequate understanding of his situation. Harold had a better than average grasp of his situation. Yet, as you’ll find out, the results he got by dealing with the IRS on his own were not inline with his expectations.
He owed about $19,000 but he couldn’t articulate why he owed. I questioned him around the issue but felt like his answer was an all-too-common response: “Some tax returns were filed late and they hit me with penalties and interest.”
This guy had some motivation to fix his tax problem. He was already in a direct-debit installment agreement, i.e. a payment plan where the IRS receives their payment electronically and automatically from your bank account. His monthly payment was just $241 per month.
That monthly figure intrigued me. Here’s why…
The Freshstart Initiative – is an option to fix your tax debt. You can have a monthly payment with no financial disclosure to the IRS over a set period of time depending on how much you owe.
- If you owe less than $25,000 in back tax to the IRS, you can usually call the IRS and request to repay the debt over 60 months. That’s a monthly payment of about $417.
- If you owe up to $50,000 but more than $25,000, you get 72 months to repay.
- If you owe up to $100,000 but more than $50,000 you get 84 months to repay.
Harold’s payment was substantially less than what was expected under the Freshstart Initiative which implies that he provided financial information to the IRS. I mentioned to him that the payment granted more flexibility than usual and he confirmed that he had in fact provided financial information to the IRS and also, appealed their decision on two separate occasions.
I can only imagine how much time Harold spent on the phone with the IRS–my guess is at least 10 hours — and what administrative burden he endured to provide supporting documentation to the IRS.
With these additional revelations: providing financial information and appealing IRS decisions, his questions about removal of the federal tax lien from his credit report started to make a lot more sense. You see, while the IRS did grant Harold cash flow relief by offering him a lower payment than what the Freshstart option, it also came with a parting gift of a federal tax lien. The lien is basically a public announcement that you owe the federal government. It affects your creditworthiness with some creditors.
I’m forced to bring up the federal tax lien only because Harold did. He was under a mistaken belief that the lien would be removed after his 3rd payment and a successful petition. This is another example of the dangers of shallow learning of technical information. The Freshstart Initiative has a provision for requesting the removal of a tax lien BUT only if one satisfies the Freshstart requirements. Harold’s smaller payment doesn’t satisfy the requirements.
I am often the bucket of ice water splashing on top of someone’s head. I hear their story, dissect their mistakes, steer them in the proper direction. Some people appreciate my candor – take their lumps, hire me to try and salvage their situation. Others flail.
He wanted to get rid of this tax debt and the associated federal tax lien. “As soon as I get rid of the tax lien, I want to do an Offer in Compromise.” The Offer in Compromise program allows someone to settle their tax debt for less than what they owe if they meet the qualifications and requirements.
More questions from me…
Do you have monthly credit card payments? I do.
Does your wife work? Yes. She earns as much as I do but we file separately and I don’t want her to be a part of this.
Are you a homeowner? Yes.
Does your home have equity? Yes.
How much? $100,000.
I heard enough. Harold would not qualify for the Offer. Almost every one of the above questions presented another obstacle to the OIC plan.
His fantasy for relief, i.e. paying substantially less than what he owed, wasn’t going to happen either. He had done a good enough job getting himself relief by negotiating a payment that his cash flow could manage but he didn’t realize what he traded to get it.
The most important lesson learned is that …
you can try to fix it on your own BUT you would be well-served to remember Learning 8a.
If the IRS believes you can pay – you will probably repay what they say you owe.
Fixing on your own means putting some time in to learn what can be done. Then spending the time to implement and execute. Problem with learning about this is the type of knowledge that is. Specialized and has limited usefulness, especially if your learning wasn’t great to begin with.
As an example, my furnace recently stopped working. I did notice for a couple weeks a new sound coming from the utility closet. There was a grinding sound which I assume (correctly) was the sound of a failing motor. I have no idea about how I know what a failing motor sounds like. I’m not the handiest guy in the world but can sometimes do simple part replacement. These days between google and youtube you can invest an hour and decide if you want to invest more time to DIY (Do It Yourself) or hire a professional. I was able to figure out the part number and locate the part affordably on Amazon but decided to hire a professional to install it for me. I had decided that this was a project that I could do on my own. I saved a little money locating my own part and paid the professional for his experience and labor.
Other situations haven’t worked out as nicely. I have purchased parts, replaced them and realized the problem wasn’t fixed. So I wasted time, money and more time and money by hiring a professional after flailing.
IRS problems can be tricky because if you call the IRS, you must work with an IRS representative who may not be interested in helping you. As in Harold’s case, he worked very hard to get the best relief he qualified for: a lower payment that accommodated his cash flow but he didn’t know what else came attached to that plan i.e. the federal tax lien and that no further relief was possible – he was going to pay in full over time.