When I think about someone who I perceive to be smart I think about people who understand the concept of leverage- especially if they are talented enough to earn $50+ per hour. I dare say, If you’re smart, you should have some level of self- awareness and as a result, be able to ask yourself difficult questions. Fixing your tax debt is achieved by asking and answering those difficult questions.
So, shall we begin?
Difficult question number one: Do you accept the tax liability?
Acceptance of the situation is essential. It is also the last stage of grief according to the Kubler-Ross model. I wrote another article here mapping what thoughts can manifest when dealing with a tax debt. If you don’t accept the liability, then the rest of this article will not be helpful to you.
Difficult question number two: Do you understand how the tax bill came about?
This is important because if you don’t know how the debt was created, you will have a very difficult time preventing it in the future. Understanding the debt’s origin will help you to figure out if it is preventable. Making a tax debt preventable may take some time. During that transition, you might have to renegotiate an arrangement with the IRS several times until your grand plan is achieved – a workable arrangement between you and the IRS that will resolve the issue.
An example…
Tom S. cashed out some money from his retirement plan when he was in between jobs. He worked for the first four months of the year but his job loss lasted longer than he planned so he was forced to cash out part of his retirement plan.
On the surface this might seem like a one time situation. But If the job loss stretched over into the next year and Tom took another distribution in the new year also, there would be two years worth of income tax due, as well as interest and penalties. Moreover, Tom might need to make some adjustments to his current finances during the transition between jobs. Some of those adjustments might be to make overtures to the IRS to delay payment, or renegotiate payments when the new tax appears.
Another example…
James R. stopped filing after his wife got sick. There was nothing malicious in his intent, he was simply spread too thin. Between maintaining the household, caring for his wife and children and keeping his electrical contracting business going, he simply could not do it all. Something had to give. The IRS was the victim of diminished attention when he paused filing for a few years.
He knew that he would owe. He had never gotten into the habit of making regular estimated tax payments. James would simply try to make a large payment on April 15 and scramble to try and pay off the bill before the next year or at least until the next filing deadline.
Difficult question number three: Can you afford to pay the IRS?
Once you’ve dealt with those two questions, the next serious question to ask yourself is can you afford to re-pay the IRS? It is not rhetorical. Even after working with people for over 15 years, I still experience a mixture of being impressed, surprised and dumbfounded by people who earn $10,000 or more per month and who say to me they cannot afford to pay $300 or $400 a month to the IRS. It boggles the mind.
But I got bills…
I totally understand the sentiment. We all have our financial obligations. An often overlooked obligation is taxes. Also, if you’re in a situation where you are collecting income without taxes coming out you can feel richer than you really are. Sometimes that feeling turns into an entitlement.
Another example…
Myra H. does really well for herself and her family. She was a marketing executive at a large company earning nearly $200,000 a year. When her husband was working, they enjoyed a very high standard of living. They earned enough to send their children to private religious schools and never had to worry about their day-to-day cash flow.
The origin of their tax debt was unusual. But after trying to fight it for years and years, they gave up. Eventually, they will have to repay the debt. Yet, Myra still hasn’t fully accepted the liability, they have taken steps to stop future liabilities but now they are stuck on question three. Myra simply cannot accept that their budget should be able to accommodate a payment to the IRS of about $700 per month. Redonkulous!
Myra cannot prove to the IRS that she does not have the cash flow to repay the debt. If she presented her finances for review, the IRS would pick apart her budget and disallow the expense for religious private school her children attend and her family’s above average mortgage payment.
The reality of someone saying to the IRS that they cannot afford to repay when you earn income in the top 6% of all Americans means you are not managing your personal finances well.
If you owe the IRS and you make more than $10,000+ per month, the best way to fix your tax problem is to agree to repay the debt. Depending on how much you owe and how much time is left to repay it, the IRS could allow you to re-pay it over 60 to 84 months.
In terms of repayment, the absolute worst case scenario for a $100,000 tax debt would be $1,200 a month for repayment. $1,200 per month seems manageable, if your gross wages are $10,000+ but maybe I’m maybe a sucker. Also, that payment could be done without financial disclosure. This means no judgment from the IRS about how you spend your money. If you and your partner want to drive matching Telsas but have to finance them, the IRS will not interfere.
This advice obviously doesn’t encompass every situation. I’ve spoken to people who earn over $10,000+ per month who do qualify for relief. Relief might mean repayment is on hold or a settlement is possible. At higher incomes, those cases are the exception, not the rule. Generally, there are some pretty specific requirements for a situation like that. Hefty out-of-pocket medical bills and or substantial child support or alimony obligations are a necessity.
So there’s no relief available?
All hope is not lost. If you are able to establish a payment plan with the IRS and you honor those payments, there might be an opportunity to request and receive a first time penalty abatement. There are requirements and sometimes the savings is minuscule, but savings is savings, right? However, there are some configurations of circumstances that can result in noticeable and worthwhile savings.
What does a tax resolution company do for people who earn $10,000 a month?
The first thing that a reputable company will do is honestly guide you into the proper path. There should not be pie in the sky, unrealistic resolution strategy that is doomed to failure. If a strategy is presented, do you want to do it yourself (DIY) or do you want a company to do it for you? (DFY)
If you do it alone, there’s no more need to work with a tax resolution company unless you have further questions and want expert answers to those questions.
If you want a guide, a reputable firm should be able to deliver on its promises to get you a payment plan and terms you agree upon after all information is verified. It will save you many hours of frustration. A good company can also help you with determining if you qualify for the FTPA and help you receive that reduction.
For more information visit www.taxdebtamericaproject.com.