No BS Guide: How to fix your tax debt if all you want is to simply repay it.

Everything you need to know before establishing a payment plan to repay your tax debt.

In general, you’ll need to do all of your inquiries via phone. I can hear people groaning about this — yes, it’s true, hold times are extremely long at the IRS. Moreover, you might sit on hold for hours only to have the IRS hang up on you. Or, after your patience is tested, you get challenged by a jerk IRS representative who has no interest in helping you fix your tax debt. Psych yourself up! Make sure you have the energy to go through this process; otherwise, you might fail.

Preparation before the call

Before calling the IRS, you should have some basic awareness of your situation. You should know the answers below. If you don’t, you might waste a bunch of time and not get the outcome you are looking for.

Have you filed all of your returns?
Are you certain the IRS has processed all of your tax returns?
This is a very important question because you might make a plan to repay some (but not all) of your tax debt. The part that was not included in the payment plan will remain in collections and could default any arrangements you make, forcing you to start over. Moreover, if tax is in collections, that means your wages could be garnished or bank account frozen while making payments to the IRS. No one wants that.

Do you know the exact amount that you owe?
Are there any statute of limitations issues (this applies for older tax debt)?
If you don’t know the amount you owe, then it is very difficult to calculate the payment the IRS will accept. If your tax debt is older than 5 years, you might run into a statute of limitation issue. It’s possible (but not easy) to determine the assessment date from your transcripts. If the assessment date of your oldest tax debt is less than three years ago, you shouldn’t have any statute of limitations issues. Assessment means the IRS puts your debt in the books and starts counting the 10 year period where they are able to collect from you.

For example, today is November 2020. And, if you have a tax debt from 2016 that was assessed in November 2017 or later, then there’s no issue. If your tax debt is from 2008 and assessed in November 2011, that means there’s about 2 years left that the IRS can collect from you.

If you know the amount owed and if there’s no statute of limitations issues, here’s a table to figure out what to offer the IRS when you talk to them.

*Amount Owed*	*Payment Period*	*Monthly Payment*
*$25,000 or less*	*60 months*	*$417*
*$25,001 to $50,000*	*72 months*	*$347 – $695*
*$50,001 to $100,000*	*84 months*	*$596 – $1,190*

You should be able to call the IRS and offer a payment from this table. I must reiterate that, in order to do this, the following assumptions should have been met.

You reached a helpful IRS representative.
All of your tax returns are filed.
There are no statute of limitations issues.
You can actually afford the payment without incurring new tax debt.

Do you want to do electronic payments?
It’s more convenient if the IRS simply debits your account monthly on the day of your choice. You can request for the IRS to set it up. Fair warning: The IRS is notoriously bad at this. You’ll have to submit a completed 433-D form. There’s no guarantee they’ll receive it unless you fax it to the representative while they wait. Even then, three out of ten times, it will fail. So you’ll have to go through the process again, spending more hours on the phone.

A better bet is to set up your account with the Electronic Federal Tax Payment System. It’s a little clunky. You sign up online but then the government mails you your PIN number so that takes about a week or so. But, once you set it up, it just works. You can set up your installment agreement payments to happen automatically. It’s free, gives you control, and you can use it to make estimated tax payments as well, if you need to do that.

Post-call checklist

Is your payment plan formalized?
Within 6 weeks of so, you should be getting correspondence from the IRS formalizing your repayment. You should be getting a statement with a request for payment that you tear off and mail in with your payment. You won’t have to do this if you make your payments via EFTPS.gov. You can also make your payment using one of the options on the IRS website. (See below, 2nd column of white boxes, 4th down.)

Is the money coming out of your account in the way you expected?
If you signed up for the IRS to take the money using the 433-D, is it happening according to plan? If not, you’ll have to call the IRS and restart the process.

Did you get something totally unexpected from the IRS instead?
As described above, there’s a ton of potential landmines you can step in; sometimes you can see them and sometimes they are totally a surprise. Deb Stuart, of Jupiter, FL called the IRS to set up a payment plan after her wages were being garnished. The IRS representative was sweet as pie. He offered to stop the garnishment and offered Deb a manageable monthly repayment plan of $230 a month. Deb was excited to share that news with me. Six weeks later, she received correspondence from the IRS thanking her for her promise to pay the debt off in full, which is totally not what she promised. Needless to say, but Deb had to go back to the drawing board with the IRS and had to start the promise again.

Other considerations

Do you owe a smaller amount; $5,000 or less?
If you owe a smaller amount and are eligible for refunds annually, then you might not need a formal payment. You can send in monthly, voluntary payments of $100 or so. That plan will have you paid off within 4 years or less, depending on how big your refunds are.

Did you request First Time Penalty Abatement (FTPA)?
The FTPA is a guaranteed reduction or removal of penalties on one year of taxes owed assuming the tax year qualifies. In order to qualify, the tax year cannot have any tax owed for the 2 years prior to the year where you are requesting the FTPA. It’s a 0 or 1 situation. You either qualify and will get the relief if you request, or you don’t.

Can you pay more?
If you’re reading this guide, it means you intend to repay your tax debt. As described above, you can pay over time but there is a cost to that convenience, i.e. interest. The IRS will charge you interest on your tax debt until it is paid off. Currently, that interest is 6% per year. Not a credit card rate but not nothing either. If you can pay more, you’ll pay the debt off faster and save a little money. The plans described above are minimal payments with no financial disclosure. There’s no penalty for paying more or paying faster.

If you found this guide helpful, please comment on Facebook or leave us a review on Google. We certainly appreciate it if you do. If you have questions, you can call us at 800-341-0411. We know not everyone will hire us but if we can prevent people from making mistakes, there’s no excuse for not being a corporate citizen. As always, we wish you nothing but success in getting your tax problem fixed! help@taxdebtamerica.com

If you would like to find out your exact payment amount, please fill in your email address and we can have a chat and discuss your options.

You are closer to tax debt than you think…

Can you slip into Tax Debt America and if you do, can you get out?

An article (and quiz) at the New York Times by Emily Badger & Margot Sanger-Katz asked the question – Could you manage as a poor American? I began to think about this question with respect to tax debt – how does one can fall into tax debt. Tax debt isn’t a situation I would wish on anyone – obviously it’s a financial condition and in many cases just unfolds suddenly. Would you make the same mistakes that cause people to owe the government? Here’s a short quiz to figure out the effect from what might appear to be a harmless stumble.

Have you experienced a large once-in-a-lifetime type of event? Winning a lottery or receiving a large sum of money from cashing out retirement all at once.
Relied on someone you trust to “handle” your tax affairs?
Had to make “rob Peter to pay Paul” type of decisions about your expenses and other obligations?

Here’s a couple stories where people think they are on the correct path – only to be blown up by an unexpected tax debt.

Jim Snodgrass of Wichita, KS had retirement on his mind. After 33 years working at the large agricultural company in town, he could see a light at the end of the tunnel. The company was offering to buy-out long term employees by offering an early retirement plan. Jim would get a severance package which would double his income this year – even though he only worked 6 months!

Though he wasn’t yet 59 and a half, Jim figured he could pay off his house and truck and live comfortably off the rest of the money until he was able to collect social security. It seemed like a reasonable enough plan until he received a large and unexpected tax bill!

This was Jim’s once-in-a-lifetime type of event. With his regular income, his severance and his retirement money, for the first time in his life, Jim reported income that placed him in a never seen before tax bracket – and resulted in a tax bill for the first time in his life.

He had already spent the money paying off his home, his car and some credit card debt. A little was left over – but Jim still had regular (albeit diminished) living expenses like food, utilities, insurance. What to do? His plan for retiring early was falling apart.

Mike Olenfeld from Manketo, MN drives a truck to make his living. Over three million people do the same supplying our familiar Walmart, Target, Home Depot or local grocery store. Truck driving can often require driving long-haul where a trip can take several days and a driver will have to stop to rest somewhere before continuing. Being away from from home makes doing things at home rather difficult.

Financially related tasks are pretty tough to complete unless you have someone you trust to help. Usually that person is your wife whose life is tied up with yours and generally, both you and your wife are pulling in the same direction. Mike was married and likes to joke that he’s allergic to paperwork. He can get his loads to and fro’ but don’t ask him about how much he made or what his tax bill is – he’ll just say ask my wife.

Alice wasn’t married to Mike and definitely wasn’t happy. She had been planning to leave for a long time. She didn’t like being alone for long stretches of time when Mike was on the road. She hated being his accountant and bookkeeper. When Mike arrived from a two-week haul, he would present a plastic bag full of truck stop receipts to Alice. Her job was to sort and organize them for the accountant when it came to prepare their taxes. Alice was also supposed to make estimated tax payments – the current estimated tax due quarterly.

Alice stopped making estimated tax payments. Alice stopped filing. And then Mike was surprised to come home to an empty house. Alice was gone and took everything with her. The financial impact was severe. Utility bills were past due. So was the rent on the house. Alice had been stockpiling Mike’s cash so that she could escape.

All of his sudden, Mike found his world upside down. He was broke, alone and nearly homeless. It took him three years to figure out the IRS said he owed $80,000.

—

The divorce was finalized. Mary would get the house and the two kids. John would have to pay child support. Then there was the matter of the retirement money. Mary would get some of that too.

He and Mary were doing pretty good financially. Together, they were earning over $100,000 which put them in the top 15% of income in the US.

Regardless of why the divorce happened, John’s finances took a triple whammy. He went from filing married filing jointly with 2 dependents and being a homeowner with its associated tax breaks, to a single person who now rented an apartment with no dependents, and a child support obligation. On top of that, he was forced to give his wife, part of this retirement savings and since he was not 59 and ½ yet, he had to pay income tax and penalties.

The quick change to his financial position meant John had to improvise with respect to his finances. He could no longer cover all his bills so he instructed his employer to send less of his income to the IRS. This helped in the short-term but made his tax bill much worse.

All of these stories illustrate the speed at which tax debt can happen. I’m reminded of the quote, “how did you go broke? First slowly, then all at once.” The same idea rings here. Tax debt can happen quickly and unexpectedly and then grants people a place in Tax Debt America where fixing the debt isn’t so easy and can often take years.

10 ways to reduce your disposable income

If you have a tax debt and you think you might qualify for relief because you cannot afford to repay your tax debt, here’s a list of “allowable” expenses that the IRS will take into account in collections context. The collection context is you having a chat with an IRS representative about your bills and why you can’t pay.

A word or two about “disposable income”. If you owe and can’t pay you must prove it to the IRS. The IRS has your income information from your tax return or W2 and will compare those income (and expense) figures to national, regional and local standards for things like housing and utilities, food, clothing and other items and transportation – the operation and maintenance of your vehicles(s). When that calculation is complete, if there’s any money left over, that’s called your disposable income (DI).

Here’s a list of expenses (and other hacks) that can be used to reduce that DI.

Term life insurance – Term life insurance is the type of life insurance with no attached saving account. You are basically renting the insurance. It only pays a death benefit if you die within agreed term. If you survive, the money you paid into the policy is gone forever. The IRS allows this expense and it can reduce your disposable income accordingly. If they allow it, you’re basically getting life insurance before paying back taxes! This is a great deal! Also, as you get older, the cost of life insurance goes up – this means if you are older, a term life insurance policy can take a big bite out of your disposable income.
Health Insurance – same idea here. Health insurance seems controversial because of the baggage associated with the Affordable Care Act but if you don’t have health insurance and you have to pay back taxes, you can pay for health insurance before paying for back taxes.
Regular monthly medical bills – If you have medical or dental debt you are regularly paying on, same thing applies. You can pay for it before repaying back taxes. You’ll notice I bolded and italicized “regular” – if your payments are not regular the IRS will disallow.
Court ordered Child support or Alimony – Divorces are one of the most common causes of tax debt. These payments are allowed in a collections context. Alimony is deductible, child support is not.
Regular payments to student loans – If you have student loans, the IRS will allow you to make your payment before repaying back tax.
Estimated tax payments or additional withholding – If you are self-employed or not having enough tax withheld as an employee, the IRS will allow you pay this money before repaying back tax. One of most important rules about fixing a tax debt is you must not owe again in the future.
401(k) Loan repayments – If you have borrowed money from your retirement plan like a 401(k), the IRS must allow this as well.
Hack 1: Have another child. This is a not a hack in the traditional sense but if you are planning to have a child or another child, it can affect your disposable income figures. A larger household size increases allowable food, clothing and miscellaneous expenses as well as those for housing and utilities.
Hack 2: Move somewhere more “expensive” – Part of the standards are based on census data at the county level. If you’re not living in one of the top 250 most expensive counties in the US and would like to live there, then that can have an outsized effect on your disposable income.
Hack 3: Upgrade your car(s), get a second car. Can we just agree right now the United States is the most car obsessed country in the world? A tax benefit for having a car payment – come on! The national standard for a car payment is about $500 so if you want to drive a nicer, newer car (or two) before repaying your tax debt – this is possible.

The above list is a compilation of hard-won lessons in negotiating thousands of cases before the IRS. The team of tax professionals with whom I’ve worked has used some or all of these items to get our clients the best outcome they qualify for. Using the above information is constrained by the experience of the IRS representative you reach but if you are trying to fix this on your own – good luck. You can always email me or someone on my team here: help@taxdebtamericaproject.com.

Fixing Your Own Tax Debt

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.

Harold flailed.

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.

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.