Dealing with a tax debt can be a traumatic financial experience. People come to grips with the mistakes whether intentional or not, then fight through the bureaucracy and red tape towards a solution alone or with a guide. Some people come out unscathed, others feel the effects but eventually manage and a third group are scarred indelibly forever.
I’m a believer in the ideas behind financial literacy – but what encompasses financial literacy can take a lifetime to learn. Financial literacy doesn’t determine financial success but understanding some elements of it can be very helpful when managing a tax debt. Here’s a couple examples of some applications of that knowledge, some very successful, others not so much.
Bankers know about money
Pat Williams has seen financial success – his own and others., He has experience the ups and downs in the economy. His income is literally dependent on those fluctuations because he is a banker. When the economy is booming, he does well. He can earn a bonus that most people dream about. When the economy doesn’t do as well, his income suffers. Pat earns over $100,000 and has done well for himself and his family. The unevenness of his income, feast or famine, has led to a tax six-figure tax debt.
We were able to get Pat some from the IRS based on his ability to pay. His ability to pay was diminished at a down point in the economy. We were also able to take advantage of the expiration of tax debt because of the statute of limitations. Pat had been dealing with the tax issues on and off for several years. The expiration of that part of the tax debt saved him a ton.
Pat is a very grateful client. With our help, he has his tax debt under control and some portion of it is diminished. For him the decision to hire the Tax Defenders was further validated because he was able to get a return on his investment. It makes sense that a banker would look at this way. He paid $1 and got $3 back.
For Pat, his interaction with the IRS is just a business transaction. There is an understanding of a debt and the high likelihood that he’ll paying most of it back when his income returns to the bonus levels. The only psychological mark the IRS left is that he was lucky the circumstances aligned for him to not have to repay all of his tax debt.
What does a Veterinarian know about money
Rhonda C. went through a messy divorce. Her ex husband wanted alimony and full custody of the kids. The legal bills were mounting and her veterinary practice was suffering too. She simply didn’t have the time to see her (animal) patients while going through the divorce process. Her income diminished as a result and he stopped making her estimated tax payments. Three years later, she facing an unmanageable tax bill.
We were able to negotiate a successful Offer in Compromise (OIC) for Rhonda. With her tax debt gone, she was able to start her life again after her divorce. She paid just 5% of her six figure tax debt.
All of Rhonda’s tax trouble didn’t end there. A successful OIC has a compliance requirement for the five years that follow. Rhonda’s long-time tax preparer was in the early stages of Alzheimers and neglected to file on time, putting her accepted offer in danger of default. We are still working with the IRS to save her offer and feel confident we will be able to save it. For now, Rhonda seems to see the light at the end of the tunnel.
The psychological toll of the divorce and dealing with the tax debt have been heavy. Rhonda takes it day by day, looking forward to the day when all of this will be behind her. So far, this nightmare has lasted three years.
Knowing nothing about money
Maria Matthews is a low information tax payer. She stayed home and raised their children, relying on her husband to provide for them. Whenever her husband asked her to sign the annual tax return, she would do so dutifully and without asking any questions. After the children have grown up and moved out. Maria’s mother got sick. She returned to her parent’s home to help care for her ailing mom. She had no income – mom’s retirement income would sustain both of them while Maria cared for her mom.
Physical separation became marital separation but not divorce. Maria had not heard from her husband for several years and came to terms with it. When mom finally died, she expected to inherit the home, sell it and live off the proceeds. Maria came to learn that federal tax liens had been filed against her. They were the result of her filing jointly with her husband so many years ago. With no support from her husband, no income of her own, she had no to continue the necessary payments for the house. She sold the home – what equity mom planned to leave Maria was seized to satisfy her estranged husband’s tax bill.
Maria was left penniless. I don’t know what happened to her but have to believe the process broke what little faith she had in the possibilities of the future. This experience has painfully scarred her for the rest of her life.
Financial literacy can be helpful in fixing a tax debt but having a guide to help you through it can amplify the result of that knowledge. Sometimes having a trusted sherpa is sufficient replacement for no financial literacy at all. When we are talking about stakes, not just financial but psychological as well, having an experienced person in your corner can make all the difference.