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, I have a rule. It kind of stems from my rule regarding work from home opportunities (“Never pay a fee to get a job”), and it goes like this: Don’t get screwed 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 $25,000 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 5 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 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, and while plenty of people do these themselves, many choose to hire representation to help them out on this (but you still need to be weary of getting screwed on fees and doing business with a reputable firm).

Until tomorrow,

Jassen Bowman, EA