Categories
Tax Planning

Where did your tax debt come from?

For the vast of taxpayers, both individuals and businesses alike, their very first tax bill stems from a series of events.

For individuals, it can be that you simply don’t pay attention to your tax situation throughout the year (hint: you should!). You think of your taxes as a once a year affair, rather than taking a proactive approach to regular tax planning. Perhaps you got a bonus, a raise, or a gambling win at some point in the year that boosted your overall income for the year into a higher tax bracket, and didn’t adjust your withholding at that time to compensate. Or perhaps you had a large debt forgiven or took money out of an IRA early, and didn’t plan for the tax consequences. Failing to take into consideration a significant life change, such as no longer being a homeowner or losing an exemption and tax credits because of a child growing too old to claim, can also have a major impact on your tax situation.

For businesses, it can start with a rough month, and simply not having the cash laying around on the 15th to make the payroll tax deposit for last month’s payroll. Essentially, it becomes a matter of convenience to skip that Federal Tax Deposit one time. Well, in my experience, that one time becomes an expedience for the entire quarter, then two quarters, with no warning or anything from the IRS. Then, suddenly 8 straight quarters have gone by and you get a tax lien notice and a call from IRS Collections, not to mention you are suddenly informed of the massive penalties, which can double the size of your initial tax debt.

Whenever you have a “life event”, be sure to take into consideration the potential tax consequences. What is a life event? Anything to do with large asset acquisition or disposal (such as a home), anything to do with children, marriage, divorce, bankruptcy, foreclosure, job change, moving, or anything that drastically changes your bank account balance. If you are self-employed, there are even more definitions for a “life event”.

For business owners, don’t fall into the “it’s easier not to pay this month” trap, especially with payroll taxes. The long term consequences simply aren’t worth it. In fact, it’s cheaper to raid your personal retirement plan and pay the 10% early withdrawal penalty than it is to pay the penalties that add up for not paying payroll tax deposits. If you have a short-term cash crunch, it’s also better to put off paying OTHER bills, rather than the IRS. It’s simply cheaper to catch up on rent, utilities, vendors, and other business bills, rather than paying the IRS’ extortion-level penalties.

If your business is experiencing a longer term cash crunch than just one month, than you need to take a serious examination of your business. Cut costs wherever you can. If you have insufficient revenue coming in to cover the complete costs of maintaining an employee (their salary, benefits, worker’s comp, payroll taxes, etc.), then you need to start cutting hours, considering temporary layoffs, and letting some employees go entirely. Yes, it sucks to cut somebody’s hours or lay them off, but you’re running a business, so run it like one.

You should also look at ways to increase revenue. I do not discuss business growth and marketing on this particular blog, as it is not the place for it, but I do substantial marketing consulting and coaching for a number of businesses in various industries, and the most fundamental thing I tell each and every business I work with is this: As a business owner, you are first and foremost a marketing and sales professional, and a contractor, trucker, baker, childcare provider, or chef second. If you don’t embrace this concept, your business won’t survive, pure and simple, so invest the time and money into better marketing your products and services, and you will make more money.

If you take a proactive approach to tax planning, you will never have an unexpected tax liability. Discuss with your professional tax advisor any potential consequences of a life event. Business owners, keep your books up to date and be sure to review your financial statements every month. The vast majority of businesses that I have helped resolve tax problems for over the past four years kept their business records in a drawer, if at all, and failed to properly maintain accounting records (which is required by law, just for the record).

If you need assistance getting your books in order, setting up QuickBooks, selecting a payroll service, or need advice about the tax consequences of a personal life event, please contact me.

Categories
Taxpayer Representation

How the IRS views your cost of living

In general, the IRS appears to take a cynical view at people’s cost of living, and can be fairly judgmental about how we spend our money. This cynicism obviously increases dramatically the moment you have an outstanding tax debt.

Before delving into specifics, I’d like to make two points regarding the IRS personnel you’d normally be discussing your personal finances with. First, IRS field personnel such as Revenue Officers and Settlement (Appeals) Officers typically have higher salaries than the IRS National Standards for the areas in which they are assigned. In other words, even as public servants, they make more money than their own standards set for a middle class lifestyle.

Second, keep in mind that these people are public servants. In fact, most senior IRS personnel are lifetime bureaucrats, meaning that they have never had to work in the private sector. Some senior Revenue Officers, Revenue Agents (Auditors), and Settlement Officers have actually never worked a day in their lives outside of the government, and don’t even have finance or accounting backgrounds.

Combining these two things, you can see that it’s very possible that the IRS person you are explaining your finances to has an interesting view on the world: They’ve always made an above average salary, and lack any personal experience running a business or dealing with the reality of private sector employment. This skewed perspective becomes readily apparent in talking to senior IRS personnel if you’re a middle class taxpayer or “mom and pop” small business owner.

Now, with that said, let’s talk about the IRS National Standards. The government uses national and local cost of living data to establish norms for the cost of living across various categories. Some cost of living standards are the same for everybody, while others, such as housing and transportation, are adjusted by region.

These standards are based entirely on the government’s definition of a middle class existence. In other words, for purposes of determining how much of your income the IRS expects you to fork over in monthly payments on a tax debt, they only allow you to claim a middle class lifestyle.

It is not uncommon for me to have a conversation with a client where I’m explaining this, and they get frustrated. When you’re in IRS collections, they don’t like seeing that you’re making $1500 per month car payments on a Hummer and a Corvette, or have two people living in a 4200 square foot home. If you are used to a certain lifestyle, you may not quite understand why these things would piss off the government when you owe back taxes.

The main thing to remember is that the IRS National Standards are calculated from a middle class lifestyle standard. While you may consider yourself middle class, statistically you may in fact be upper-middle or even upper class. Keep in mind that the median household income in the US is about $52,000 per year. This means half of households make more, half of households make less. This number, by definition, represents middle class America, and is what the IRS National Standards are based on.

If you owe the IRS a substantial amount of money, and are living above the IRS National Standards, it is possible to negotiate up to a 12-month “stay of execution” against you with IRS Collections. This time period is designed to allow you to reduce your lifestyle to a middle class existence. This would include downsizing to a smaller home, selling cars, boats, and recreational vehicles, etc.

It wasn’t until March 2012 that the IRS finally allowed taxpayers to claim their minimum credit card and student loan payments as allowable expenses. At the same time, the IRS made a major change in how an Offer in Compromise is calculated, drastically reducing the amount they expect you to fork over in a reduced settlement situation. These changes have made literally hundreds of thousands of tax debtors now eligible for the OIC program that previously were not, so it’s worth looking into.

When it comes to discussing your standard of living and associated expenses with an IRS field agent, understand that you are both going to be frustrated, and for very different reasons. If you live a higher than middle class lifestyle, I would definitely suggest having a representative work on your behalf with the IRS, not only to avoid you frustration with these types of conversations, but also because a representative is going to be more knowledgeable regarding what expenses can be negotiated for inclusion with the IRS.

Categories
News Tax Returns

Attention Truckers: Don’t forget to file Form 2290 this week

If you are a tractor-trailer operator or run other heavy highway equipment, you are probably already familiar with IRS Form 2290 and the payment of heavy vehicle highway use taxes. In general, this return is due on August 31st, along with payment for your vehicles that are taxed as heavy vehicls.

The deadline generally applies to Form 2290 and the accompanying tax payment for the tax year that begins on July 1, 2012, and ends on June 30, 2013. Returns must be filed and tax payments made by Aug. 31 for vehicles used on the road during July. If you put a new vehicle into service after July 2012, you will need to file another return and pay the tax on that vehicle by the end of next month after placing the vehicle in service. So, if you put a new rig into service in November, the return and the tax are both due on December 31.

The highway use tax applies to highway motor vehicles with a taxable gross weight of 55,000 pounds or more, which generally includes trucks, truck tractors, and buses. Ordinarily, vans, pick-ups, and panel trucks are not taxable because they fall below the 55,000-pound threshold. The tax of up to $550 per vehicle is based on weight, and a variety of special rules apply, which are explained in the instructions to Form 2290.

If you have not yet filed and paid these particular taxes, they are eligible for electronic filing and electronic payment through EFTPS. If you need help with the return, or getting the payment made, feel free to contact one of the tax firms listed in our directory.

Categories
Taxpayer Representation

How To Deal With An IRS Notice

Most people tend to panic when they receive a notice from the IRS. Many, many people think that by stuffing that notice under the mattress, the problem will go away. Unfortunately, it doesn’t work like that. The best way to address a notice from the IRS is to deal with it immediately and head on. Here are some tips for what to do when you receive an IRS notice.

1. Don’t panic, and don’t shred it. Most IRS notices can be dealt with pretty simply. Not quickly, but simply.

2. Be sure you understand WHAT the notice is for. The IRS sends all sorts of notices — bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of pending deadline, etc. The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

3. Every notice from the IRS will explain what you need to do with it. If they want extra information from you, it will explain what information they need. If it’s a bill, well, then they just want your money.

4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.

5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.

6. If you do not agree with the correction the IRS made, it is important that you respond as requested, within the time limit. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days for a response from the IRS.

7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.

8. Keep copies of any correspondence with your tax records. Also keep record of who you talk to, including their IRS employee ID number (they’re required to give it to you), and detailed notes of your conversation.

If you receive a notice that you don’t understand or don’t agree with, then obviously consider speaking to a professional.

Categories
Tax Planning

Tips for Avoiding a 2012 Tax Bill

With the summer of 2012 coming to a close, it’s a good time to look at your tax payments you’ve made this year and see if you’re likely to accrue a tax liability for this year or not.

You should act soon to adjust yor tax withholding to bring the taxes you must pay closer to what you actually owe. If you’re ahead of schedule in terms of payments for the year, then you can reduce your withholding and actually keep more of your paycheck for the rest of the year.

Most people have taxes withheld from each paycheck or pay taxes on a quarterly basis through estimated tax payments. Each year millions of American workers have far more taxes withheld from their pay than is required. Many people anxiously wait for their tax refunds to make major purchases or pay their financial obligations. It is best, however, to not tie major financial decisions to your anticipated refund — especially if you owe back taxes for previous years, because the IRS is simply going to keep that refund, even if you filed an Offer in Compromise this year.

Here is some information to help bring the taxes you pay during the year closer to what you will actually owe when you file your tax return.

Employees

New Job? When you start a new job your employer will ask you to complete Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use this form to figure the amount of federal income tax to withhold from your paychecks. Be sure to complete the Form W-4 accurately.

Life Event? You may want to change your Form W-4 when certain life events happen to you during the year. Examples of events in your life that can change the amount of taxes you owe include a change in your marital status, the birth of a child, getting or losing a job, and purchasing a home. Keep your Form W-4 up-to-date.

You typically can submit a new Form W–4 at anytime you wish to change the number of your withholding allowances. However, if your life event results in the need to decrease your withholding allowances or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days of that life event.

If you need help determining how many exemptions to claim on your new W-4, feel free to get in touch with me.

Self-Employed

Form 1040-ES: If you are self-employed and expect to owe a thousand dollars or more in taxes for the year, then you normally must make estimated tax payments to pay your income tax, Social Security and Medicare taxes. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you are required to pay estimated tax on a quarterly basis. Remember to make estimated payments to avoid owing taxes at tax time.

Categories
Uncategorized

Let’s talk credit card debt

I realize that this is a blog about taxes, but if you have tax debt, I assume that you have other debts as well. It has only been within the last few months that the IRS has softened their stance on allowing you to claim your minimum credit card payments as an allowable expense, so it’s a topic worth addressing.

Credit card debt in general is one of the biggest problems in our society. If you rack up a lot of it, and can’t pay it, life starts to suck when the creditors start calling. Five years ago, when I was heading into bankruptcy, one of my favorite days was the day that Qwest cut off my phone service because I couldn’t pay the bill. That was when the credit collection calls finally stopped!

If you’re looking to address your credit card debt, and other consumer debts as well, there is a simple and often repeated formula for paying down and eliminating those debts. You’ve probably heard two variations of this before, but I think they’re worth hearing again now and then.

The process is pretty simple: Make a list of all your debts, and rank them by priority based on either interest rate from highest to lowest, or by debt amount from lowest to highest. Then, take any extra money you have each month and put it towards the first item on the list.

Mathematically speaking, it’s best to rank them by interest rate. Most of the time, if you owe the IRS money, they’re going to be at the very tippy top because the combined interest and penalty rate can exceed 60% APR. However, many personal finance experts suggest doing it a little different, and paying off your smallest balances first. The rationale behind this is largely psychological, because paying off a smaller debt and being able to say, “It’s paid off!” gives a mental boost to the whole process.

After debt #1 is paid off, the money that was going towards it every month is now applied to debt #2. This accelerates payoff of that debt. Once debt #2 is paid off, the entire monthly amount from that goes to debt #3 until it’s paid off, etc. Eventually, everything is paid off.

While you’re making this debt paydown process, you’re generally making your minimum payments on your other credit cards. If you’re in a situation where money is extremely tight and you’re already several months behind on some bills, it may be worth considering stopping paying on them. If your credit score is already destroyed by being 90 days behind, being 9 MONTHS behind isn’t really going to make it much worse.

This is the strategy that I ultimately went to before my personal bankruptcy. Barely able to pay the mortgage and put food on the table, I started by no longer paying on my credit cards and unsecured lines of credit. It was more important to keep a roof over my head, the lights on, and food in my belly than to worry about my credit score and credit cards. The simple reality was that I didn’t have enough money coming in to pay everything, so I had to start making decisions about what was NOT going to get paid.

Hopefully, you aren’t or won’t get to that point, but it’s nice to know that it’s an option. Remember, debtors prison no longer exists in America, and sometimes you’ve gotta do what you’ve gotta do.

Categories
Taxpayer Representation

The Truth About Tax Resolution Fees

Within the tax resolution industry, there are a variety of fee models that you should be aware of. Different fee models have different potentials for abuse by the firm offering the services, and it is important to do your due diligence and fully understand what you are paying for, how much, and when, before ever paying a single dime to a tax resolution firm.

One of the most common fee models is a retainer model, which is a carryover from the world of legal and CPA firms from which many tax practitioners come. Under this model, you pay an up front amount, which the firm holds on to and then bills against on an hourly basis. Close to the time when the retainer is all used up, you will  get a bill showing what was done, how long it took, and the hourly rate it was billed at. This bill will usually also include a request for additional retainer. The key thing to remember here is that if you don’t keep paying, they don’t keep working.

If you’ve been researching particular companies online, you may already have come across BBB, forum, Attorney General, and other complaints against some firms that aggressively bill down retainers, and are constantly asking their clients for more money, without making much significant progress on a client’s actual tax case. It is important that you thoroughly vet a company before giving them money, in order to avoid becoming another victim of a devious company.

Another common fee model is a flat fee-for-service model. This fee model has a large number of variations, from a flat fee for a specific package of quoted services, to a “menu of services” model where each service you can order off the menu has a specific fee. This latter method is very akin to the most common pricing model used in tax return preparation, where each specific tax form has a particular fee for preparing it. You’ll see this fee model used at many CPA firms and most retail tax preparation outlets.

When you are speaking with any tax firm regarding a package of services, it is very, very important that you understand exactly what services you are being quoted for, and what the company’s policy is regarding fees for additional services. When it comes to tax matters, it is not uncommon for additional services to be required, which will require additional fees if they are not covered in the quotation you are already working under. Ideally, the sales person you speak with will have conducted a thorough analysis of your situation and will have included everything in the proposal sent to you.

When comparing proposals between multiple companies, keep in mind that you probably aren’t comparing apples and apples, but rather apples and oranges. Here are things to consider when comparing proposals between firms that are competing for your business:

  • Is any tax return preparation included in the quote?
  • Does the fee include all appeals necessary for handling your case?
  • For business owners, is Trust Fund Recovery Penalty representation included?
  • How many quarters or years of tax issues are covered by the fee quote?
  • Is a penalty abatement application included, or is that extra?
  • What specific resolution option does the fee cover, and what happens if the resolution strategy changes?

This last question is particularly important. There are some tax resolution firms that will try to sell everybody an Offer in Compromise, because they charge a higher fee for this service. However, it is critical for anybody and everybody to understand that most individuals and small businesses DO NOT QUALIFY for an Offer in Compromise. In fact, the IRS accepts less than 40% of all Offers that are ever submitted, and the only reason this number is so low is because of the high number of ineligible offers that get submitted in the first place. On top of that, less than one third of one percent of all tax debt cases are resolved through an Offer in Compromise. It is also important to understand that the average processing time for an Offer in Compromise exceeds 10 months.

What does this mean for your fee? Well, a reputable firm will conduct a thorough financial analysis, and tell you whether or not you are an Offer candidate. If you are not, then they will negotiate another resolution option for you within the same fee. If a firm tells you they will charge an additional fee for negotiating an Installment Agreement (monthly payment plan) after you’ve already paid a higher fee for an Offer in Compromise, then you should seriously question this.

You should also beware the firm that tells you that, yes, you are an Offer candidate, even when you own assets in excess of your tax liability. Simply put, if you have assets that exceed your tax debt, then the IRS will never accept your Offer. There is an incredibly rare exception to this rule, but it’s so rare that it only happens a few times per year.

Another big thing to consider when discussing fees is the issue of what’s an appropriate fee, and what is too much. The cost of a service obviously varies based on geographical location, but in general fees for tax resolution services across the country do fall into a line of what’s appropriate and what’s not. Here are some examples of what would be considered standard fee ranges for certain services:

  • Negotiating an IRS Installment Agreement, penalty abatement, and all appeals on a $40,000 personal income tax debt: $2500
  • Same as above, but on a $200,000 business employment tax debt: $5,000 to $7,000
  • Trust Fund Recovery Penalty representation: from $1,000 to $2,500, depending on the nature of the case
  • Preparing a basic personal income tax return, married filing jointly, a home, two jobs, couple kids: $300-$500
  • Preparing a small corporate income tax return with less than $250,000 per year in revenue and no significant assets: $500-$800
  • Preparing a more advanced corporate tax return with multiple shareholders, assets, high revenues, etc: $1,200-$2,500
  • Negotiating an Offer in Compromise on a $150,000 personal tax debt: $3500 to $5000
  • Negotiating the release of a wage garnishment, and nothing else: $400 to $1,000

These are just examples of the types of fees you may see when it comes to working out tax problems. There are numerous factors that go into properly quoting a tax resolution fee, but when comparing proposals, these numbers can give you a good idea of what is considered reasonable across the country.

To obtain a fee quote for tax debt representation services, contact a local firm from our directory of tax professionals.

Categories
Tax Planning

Overseas assets, FBARs, and FATCA

Last month while I was in Switzerland, I had the “opportunity” of visiting the US Embassy in Bern so that I could obtain a replacement for my stolen U.S. passport.

While I was there, I met several interesting people. One was attempting to obtain a U.S. Social Security Number so that she could file the U.S. income tax returns that the IRS was demanding that she file, since she was born in America, although technically German and Swiss. She had never been to the U.S. since she was 5 years old, and was now in her 50’s and the IRS wanted her returns.

Another lady was there to renounce her U.S. citizenship, under very similar circumstances. She had also been born on U.S. soil, technically making her a U.S. citizen. She had no family or other ties to the U.S., and not visited the U.S. since her teens, but had dutifully filed a U.S. tax return for the past dozen years. She was in her mid-30’s, had no intention of ever living in the U.S., and was very happily Swiss. She was renouncing her U.S. citizenship and turning in her U.S. passport for no other reason than to get away from the hassle of filing a U.S. tax return.

For those two individuals, it made absolutely no sense for them to being filing an American tax return.

But what if you do live in America, or intend to keep your U.S. citizenship, but spend time overseas? If you have overseas assets, especially banking and investment accounts, the IRS has you right in their crosshairs, and they are increasing the pressure.

The recently enacted Foreign Account Tax Compliance Act is the latest in a series of measures by the U.S. government to track down overseas assets and make sure that they are getting their cut. This legislation created a new form for us all to fill out, Form 8938, for certain overseas accounts. This is on top of the old Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR).

Now keep in mind, there is absolutely nothing wrong, immoral, or illegal about having overseas assets or investments. Holding overseas assets can be a perfectly valid component of your financial planning strategy.

But what the IRS doesn’t like is when you are earning returns on that money, and not paying U.S. income tax on it. You see, America is one of the few countries in the world that taxes it’s citizens on their global income, even if it wasn’t generated here. If you have overseas bond income, for example, then that is unearned income and subject to income tax, without the benefit of the Foreign Earned Income Exclusion (which allows you to exclude a certain amount of earned income each year that you earn overseas).

The IRS even wants to know how much money you have sitting in foreign bank accounts, even if that money has no tax impact, and has already been taxed as earnings here in the States. If you have more than $10,000 in a foreign bank or investment account at any time during the year, you have traditionally been required to file an FBAR report by June 30th of each year.

In addition, you must now file Form 8938 with your annual personal income tax return (Form 1040) if you have a foreign bank accounts, foreign stocks or other securities, or any other foreign financial interest if the total value of all your foreign stuff exceeds $50,000. The failure to report a foreign holding can result in a fine of up to $10,000.

Here’s the biggest part of the new FATCA legislation: The U.S. government is now imposing a reporting requirement on foreign banks. That’s right: The U.S. government is forcing sovereign nations and their financial institutions to report information about American account holders to the U.S. government. Failure to make these reports will result in the U.S. government seizing 30% of any transaction coming into or out of the U.S. to or from that bank.

Some countries, such as Switzerland, that have traditionally had very strict bank secrecy protections, have been capitulating to the U.S. government and forcing their banks to send this information to the IRS, because American banking business is so important to the Swiss economy. However, many foreign financial institutions are simply choosing to no longer do business with American customers. There are nearly 6 million American citizens that legitimately live and work abroad that this could impact.

If you require assistance with FBAR compliance, taking advantage of the voluntary disclosure initiative open right now that waives criminal prosecution and some penalties, need help filling out Form 8938 or TD F 90-22.1, or have any questions regarding U.S. tax treaties with other countries or how to minimize your tax burden to the U.S., you need to retain professional representation from a CPA, Enrolled Agent, or tax attorney that has specific experience working with these situations. Be sure to search our directory to find such a tax professional near you.

Categories
Uncategorized

Are you ready for IRS collections season?

June is an interesting month at the IRS. It’s the month that marks the transition every year for the IRS from tax return processing season to tax collecting season. If you filed your 2011 tax return on time and had a balance due that you didn’t pay, then you’re now entering (or re-entering) the collections process.

If you had a 2011 tax balance, then you’ve probably already received a bill, and it’s about time that a lien gets filed if you haven’t paid the balance yet. If this is your first rodeo with the IRS, then you’re in for a not-so-fun ride. To learn what to expect, I suggest you read my article on How the IRS Works Collections Cases.

If 2011 brought you an increased balance on top of an existing tax debt, then you’ve already been through the drill. With return processing season finishing up, IRS personnel that were removed from other functions are now starting to be cycled back into their normal job functions. Many of these personnel are cycled from ACS, the IRS’ centralized collections agency. Now that they are going back to their normal jobs, the collections process will pick up.

I would encourage you to learn about your rights as a taxpayer (yes, you have rights), and to look at your options as soon as possible. Do not just ignore your tax debt, it doesn’t just go away. It is best to deal with it at the ACS level, and long before the IRS starts to consider enforced collections action against you, which could include levies and wage garnishments.

Here on TaxFirms.com, we have many resources to help you resolve your tax debt situation. Be sure to look at the articles covering your specific situation, and take a look at our directory of tax firms to locate a tax professional near you that can help you with this difficult matter

Categories
Taxpayer Representation

Options for Low Income, Low Tax Debt Situations

A friend of a friend was recently referred to me for some help with a tax problem. This individual isn’t rich, works a regular job for a paycheck, and simply got behind on personal income taxes. The situation is compounded by the possibility of some errors on the originally filed tax returns, which I have yet to examine to make that determination one way or the other.

This is NOT an uncommon situation these days. Regular, working class folks that owe a few thousand this year that they can’t pay, and the same thing the next year, etc. Do this for 3 or 4 years, and suddenly you owe the IRS $10k, $15k, $20k…with penalties and interest growing it daily. So, what to do?

First and foremost, remember this: Don’t get ripped off by a tax resolution firm promising you the world when you can easily fix the problem yourself.

Yes, the IRS carries a big stick. But they’re not going to hit you upside the head with it if you take care of the situation.

First of all, if you believe you’ve made mistakes on your tax returns that caused the liability, then you should have the tax returns amended. You have three years from the date a return was filed in order to correct it, so if you’re in that time window and you think you would owe less if they were fixed, start there.

Second, if your tax liability is under $50,000 and it’s personal income tax, then there is a special program available called a Streamline Installment Agreement that you should look at. Under this program, the IRS will let you enter up to a 6 year payment plan (or less, if you can shoulder the monthly payment), in order to pay this off. Warning: Penalties and interest still accrue while you’re on a payment plan!

If the tax debt is getting old, say older than 6 years, then another option might be to get you into a non-collectible status and just ride it out until the statute of limitations expires (which is 10 years). For this, you have to be able to demonstrate that, in a nutshell, you are flat broke and scrape by paycheck-to-paycheck. If you suddenly win the lottery, the IRS will see that and come knocking on your door again, of course.

The final option to consider, if you are broke and really just want the monkey off your back, is an Offer in Compromise. Despite the commercials you may see on TV, the Offer program is not a straight up “pennies on the dollar” deal, but you must rather demonstrate financial necessity. If you’re single with no kids, have a car payment, and don’t own anything of value (art, a house, coins, gold, guns, stocks, bonds, retirement accounts, classic cars, an island, etc.), and you make less than about $3000 to $4000 per month (it depends on what part of the country you live in), then you might be a candidate for making an Offer in Compromise of some nominal amount (it has to be at least $1). This route requires extensive personal financial disclosure and takes about 6-12 months from start to finish, most of which is simply waiting on the IRS to process the application. If you have kids or a spouse, the amount you can make and still qualify goes up. If you don’t have a car payment, the amount you can make and still qualify goes down.

Elsewhere on this blog, I cover the OIC program and Streamline Installment Agreements in further detail. Also look for the Guaranteed Installment Agreement post if you owe less than $10,000 — those are easy as pie and can be done over the phone using an automated voice response system.

If you qualify for a Guaranteed or Streamline Installment Agreement, you can easily do it yourself over the phone. Getting into Status 53 (Currently Not Collectible) is almost as easy, and takes less than an hour on the phone with the IRS. An Offer in Compromise is obviously a bit more complicated. While plenty of people do these themselves, many also choose to hire representation to help them out on this. You can find professional assistance with a local tax firm by searching our directory.