You Owe Taxes, Now What? | Incite Tax

You owe the IRS money and you're not sure what to do. Let's first establish when you actually owe the IRS money and when you're past due. When the tax year ends, technically we now owe tax for our previous year's income. That amount is due On the filing deadline. Because most S corporations and LLCs and partnerships don't owe taxes of themselves, we're really referring to the deadline to file your personal tax return, which is April 15th most years. I know that I owe them money when the year ends and I can do my taxes, but I'm late and now have a debt to them come April 15th. If I don't have them paid by then, I'm late. If you are able to pay that tax off Before the end of the year, we recommend paying as much of it off as you can, as fast as you can, and get it done. I wouldn't do anything fancy with resolving the tax debt other than paying it off before the year ends. You will get IRS letters, you are going to owe interest and penalties, but you don't have to go through giving them information on how to set up an installment agreement. You don't have to give them financial information about you because you're going to have it paid off by the end of the year. Now, sometimes we can get into debt for a variety of reasons, and that amount of debt we get into can be significant. So sometimes it's because we didn't pay any taxes at all, but we actually generated taxable income. We already talked about we accumulated the tax and we just didn't pay it on time, or maybe we paid the tax late, but we didn't pay enough to cover the interest and penalties. If I don't file a tax return at all, at some point the IRS will find me and I will need to file because they will have information. They have access to bank accounts. They can basically force you to do whatever they want. They're going to find out. Never, never like not file your tax return. Double negatives are bad. Always file your tax returns. How about I say it that way? But not filing can get you in trouble. I remember early, early in my career, one of my best clients came to me and he had gone 10 years without filing tax returns. He was in some deep stuff and not a good situation. He owed a lot of money as well. Okay, and then other reasons we might be late. We file the return late. That accumulates fees, penalties, interest. So not only now do I owe tax for what I actually earned, I gave myself more tax and penalties to pay because I didn't even file on time, let alone pay on time, 'cause there's late filing penalties and then there is late payment penalties. And then sometimes life just happens. Maybe we ended up having taxable income, but an emergency came up There could be a lot of reasons, right? The bank calls a loan due immediately, a weird black swan event happens and government shuts down the world and we can't make money, and we had to use that cash that we earned, taxable income, on other things. And sometimes it's just pure neglect. We owe tax, we're trying to run our business, we're doing our best to keep our head above water, And we just get further and further behind. Those are all a variety of ways why we might find ourselves in a situation where we have so much debt that we need to consider doing an offer in compromise. Again, what I said in the beginning, if you can pay the debt off by the end of the year, just pay it off as soon as you can, as fast as you can. But sometimes that amount's too much. The IRS has an option called Offer in Compromise, sometimes called an OIC. This is effectively declaring bankruptcy only with the IRS. In order for that to happen, you are going to send to the IRS every piece of information about you financially. It's every piece because they're going to find— they're going to get all the information anyways to determine if you even qualify. By sending them all your financial information, it's possible that then you are reflecting and saying, look, based on all the income that I am making and a standard allowable amount that I'm allowed to keep, that the IRS determines what's standard and allowable, not always favorable to our terms. I have clients who have, for example, luxury taste in automobiles or homes, so what they're paying for their car Is not the standard amount that the IRS allows when they're determining things. But anyways, the IRS has this thing, they have formulas, they have numbers. If in fact you can show with all this stuff that you're not making enough money, that you're going to be able to pay this tax back in a reasonable amount of time, they will take a settlement, meaning you could end up paying less than what you owe, but the IRS will say, we consider it paid in full. That is what an Offer in Compromise is. It's a bit of a process. There are forms that need to be filed a specific way. There's certain financial information they're looking for, and we have an expert in our company who's able to do this. It's awesome. I mean, one of the best case studies she had, the client owed more than $500,000 in taxes, And based on their current financial situation, the IRS settled with them for $100. $500,000 owed, $100 paid in full. A lot of times clients think, I need to wait to take care of this amount that I owe until I'm making more money again. The reality is, when you're struggling and you can't make that payment, that's the best time to ask for an Offer in Compromise. Because if you wait, the IRS makes a determination based on your current amount of income. So if I got in trouble in bad financial years and for some reason I still owed tax, but I wait until things are good, they're going to say like, you can pay all this off within a reasonable amount of time. So keep that in mind, and it never hurts to get an opinion if you owe a lot of back taxes. Let's say the IRS does not always approve offer in compromises for a variety of reasons, maybe the person didn't file it the right way, and, you know, maybe you simply make enough money that the IRS won't allow it. There is a couple other things you could do. One is an installment plan, it's a form you fill out, you take the tax amount that you owe, if you divide that over 5 years or 72 months, That comes up with an amount. If you're able to pay that amount, the IRS will automatically accept how much you end up paying, or a better way to say that is the IRS will end up accepting that monthly payment amount for the next 5 years to be considered paid in full. Sometimes you can do what's kind of a partial offer in compromise based on your financial situation. If you need— if you can't make that payment amount of the tax you owe divided by 72, sometimes they'll take a lower amount, but then by the end of the 5 years, they'll have accepted the amount that you paid as paid in full. So it's a partial forgiveness of taxes owed. It can get complicated. I want to just give you— The summary here, we actually will have a blog— we have a blog post that provides a step-by-step process on how to resolve your tax debt. Link is below in the description. Check that out because it can get pretty technical. And then there's also what's known as currently not collectible status. So they may not have forgiven your debt or let you settle, but you're in a situation where they're not going to harass you. of getting the debt collected. Doesn't mean they stop charging interest and penalties, but they do get off your back. So those are some options if you end up owing the IRS some money. This is definitely a scenario, because of the intricacies and the potential benefit that could come from a bad financial situation, the silver lining if you will, super important that you consult with a tax professional, because remember, the IRS actually does hate you. They told me. They wrote it in a letter, a card I got. It said, they hate you. I'm just kidding, but they really do don't like— they don't like you at all. They suck. Okay.