Can you manage having a tax debt?

Fourteen million people in the US are dealing with tax debts. This condition saddles them with another financial obstacle and can be a signal for other money worries like saving for retirement or children’s education or something more essential like not having health insurance. If they are lucky, they can get out of the tax debt in a few years. For some, they will have fallen in a trap that seems impossible to fix.

Here’s a brief quiz to see how well you could manage having a tax debt…

  1. Was your tax refund a financial windfall, i.e. a lump sum of money you expected every year to help you pay off debt, buy a car, or some other essential?  YES or NO? A Propublica article from December 2018 shares the stories of 3 separate taxpayers whose refunds were a financial lifeline staving away eviction and credit card debt. 
  2. If you continue to owe tax, do you understand why?  YES or NO. The 2018 Comprehensive Survey of Taxpayer Attitude determined that 51% of tax payers use a tax preparer. Are you getting the help you need?
  3. Have you stopped filing because you weren’t receiving refunds anyway? YES or NO?
  4. Do you know anything about IRS tax debt relief programs? YES or NO? An Audit Impact Study commissioned by the TPA included in the Tax Advocate Service – 2019 Report to Congress reported that “many taxpayers do not perceive a correspondence examination as a genuine audit.”  Moreover, I’m often surprised by people who call me thinking I’m the IRS. I’m inclined to believe that most taxpayers consider the IRS a blackbox – knowing very little about its operations and prefer to keep it that way.

Access programs that comprise the patchwork safety net to help Americans without anywhere else have simplified especially by going online. This has not translated easily to the tax world where a preparation error can cause a crippling tax debt. Even Nina Olsen, former National Tax Payer Advocate who worked on behalf of Americans navigating the tax system and its pitfalls believed the IRS “pushing people to self-service online is not good at all.”

The IRS offers free filing options for people who may not be able to afford to pay for tax preparation software through private partners like Turbotax. The private partners haven’t made access to their free filing option easy. As a matter of fact, in May 2019, City of Los Angeles, Attorney General sued HR Block and Intuit, maker of Turbotax for misleading customers to paid preparation options when even though the taxpayers qualified for free filing.

Consumers are getting a double whammy here: IRS moving preparation and access to services online forcing those consumers who aren’t good at using a computer, don’t have a computer or simply prefer filing via a paper form and private companies intentionally misleading consumers to pay for service that should be really be free. 

What about Self Employment?

If you are earning enough through self-employment to cover your living expenses – then you should be able to cover your tax obligations. We have determined (what we call the z-number) which is the net income figure you must earn before you have to repay tax debt. The z-number is only valid for tax debt relief.

There is no “get-out-of-paying-future-taxes” program available,

Truck driver, Johnny Smith generates revenue of about $100,000 per year driving his rig. At the end of the year, he always owes about $6,000. Smith has an established relationship and trucking route, he’s consistently earned $40,000-50,000 per year Why does he continue to owe and why does he continue to be surprised? The simple answer is that he may not believe it’s important. The IRS will eventually force his hand but until then, unless he decides to change something, nothing will.

The IRS answer to Johnny Smith’s problem is to have him pay $1500 every 3 months to the IRS as estimated quarterly payment. This number doesn’t work in his budget – he doesn’t believe he has the cash flow. Yet, if he breaks it down to a weekly payment of $125 – it becomes doable, the pain of making the estimated tax payment becomes manageable. 

Tax debt can happen to regular working Joes too. Many divorced dads fall into this trap. Daniel Parker became divorced from his wife. The divorce was a mess, his wife got the kids and the house. He now pays child support. He went from filing status married filing jointly with 3 children, to filing status single and zero  His child support obligation forced him to underwithhold so that he could afford to live.

Seizure of tax refunds for student loans or back child support obligations can make one feel like they can never get ahead. That hopelessness often causes people to stop filing. “She takes all my money anyway, now I gotta give her that too?” complains Jermaine Tiller who stopped filing after he temporarily lost his job and got behind paying child support. In some cases, tax payers who fail to file, sometimes leave money on the table. If they do not file and make a claim for refund, the refund to which they are entitled, is forfeit – an anonymous donation to the federal government. For those of us who pay too much already, who wants to give an anonymous donation?

Ignoring one’s filing requirement can sometimes lead to other challenges if a non-filer decides to come clean with the IRS. The documentation needed to file, i.e. w2s, may be misplaced or destroyed. If the tax payer worked several jobs and didn’t do a good job retaining that paperwork, it may be hard to remember all the different places they worked several years after the fact. This is a current frustration with the many people we speak to about obtaining their Corona Virus Stimulus payment.

However frustrating the seizure of refund checks, people should continue to file. It is better to have money to which you are legally entitled pay down debt vs. the alternative. 

Programs you don’t know about 

The public’s knowledge about tax relief programs is modest. Only 10% of American adults are dealing with a tax issue – and only a fraction of those have a federal tax lien which is usually the trigger for taxpayers to start learning about tax relief programs unless they see the myriad television advertisements. That education comes via force-feeding by the marketplace. Most consumers fail to learn and end up being swindled out of their hard-earned money by a company making promises that they have no intention of keeping.

If you find yourself a new resident of Tax Debt America, here are some tips for you to manage your (hopefully) swift departure. 

Understand why you owe

If you owe, try to figure out why you owe. I can’t tell you how many people simply defer to what their accountant tells them. Ask your preparer questions, google some information, get some knowledge so you can discuss your issue. There might be administrative actions you can take that may reduce or even eliminate your tax debt. It’s unusual but it can happen. This applies for both self-employed and regularly employed people. 

Refine your financial management

Can you afford to repay the debt? Can you reconfigure your cash flow so that you do not continue to owe? Be serious about those answers.  If you received an $8,000 refund which you should not have received, why shouldn’t you repay it?  If you are entitled to a refund for future years, the IRS will seize that refund to pay for the debt. If you can’t repay your tax debt, are you prepared to prove it to the IRS? They will ask questions and expect you to live according to National, Regional & Local standards. Most people don’t like to share that information with the IRS. 

Get to Square One

I can’t tell you about how many people believe the IRS owes them. It may be the case but there is a process. If you entitled to a refund, file your return and make your claim. If you can’t take the first step, why should you expect the IRS to take Step 2. File your missing tax returns! 

If you can repay the debt, do so, if not

The IRS will let you repay a tax debt over 60-84 months depending on how much you owe – be prepared to spend several years in Tax Debt America.  If you can’t repay the debt, you might qualify for relief but might still have to stay in Tax Debt America for a long time. One relief program called the Offer in Compromise (OIC) might get you out sooner but you should have a good handle on your finances, be at square one, and qualify for that program. Without a professional guiding them through the OIC process, it can be pretty tough to do on your own.

If have questions about any topics brought up in this article, feel free and reach out to or simply share your email in the form below, we’ll notify of any updates to this blog.

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