Credit Basics
IRS could help you dig your way out of tax debt
GAIL MARKSJARVIS
Pioneer Press
Posted on Wed., Aug. 3, 2005
Uncle Sam does not like being ignored.
So, if you're unfortunate enough to have a tax bill you can't handle, don't expect
procrastination to free you of the burden.
Consider, for instance, the Minneapolis homeowner who — in my Monday column — was
seeking a way out of a $30,000 tax problem.
He can beg the IRS for relief, but he cannot simply hope he doesn't show up on Uncle
Sam's radar screen.
While financially stressed people may be able to duck some creditors for
a while or even permanently in bankruptcy court, that generally is not the case
with the IRS.
"The Internal Revenue Service will catch up with you eventually, and it will collect its money from you one way or another since the IRS has almost unlimited power and time to collect past due taxes," says certified public accountant Howard Dvorkin in his book: "Credit Hell: How to Dig Out of Debt."
The means the IRS has at its disposal are broad — garnishing your wages, taking
money out of your bank account, putting liens on assets like your home and even
seizing or selling your assets.
Typically, the IRS doesn't sell people's homes, but it has the right to.
That can make it exceedingly difficult for people like the Minneapolis homeowner
getting out from under his debts. Since the IRS often puts liens on homes when taxes
aren't paid, the homeowner has difficulty refinancing the home at an advantageous
interest rate. So the idea of pulling cash out of the equity of a home, and paying
the IRS with it, becomes troublesome.
But if you find yourself in such a dilemma, there are options.
You can ask the IRS to relieve you of some of your debts by filing Forms 656 and
433-A for what's called an "Offer of Compromise."
But this is difficult to get unless detailed financial information proves you can't
pay now and probably won't ever be able to pay.
A better alternative may be to try to persuade the IRS to accept installment payments.
In other words, you offer to make monthly payments you think you can handle.
Credit counselors at nonprofit organizations, such
as Children's Home Society and
Family Services, can help debtors with the negotiations.
The process isn't for the faint of heart, and the outcome often depends on the particular
IRS agent handling your application. But an individual can pursue the process on
his own.
To start, you could call the IRS Taxpayer Advocates Office at 1-877-777-4778 or file IRS Form 9455 along with a letter telling the IRS how much you could afford to pay each month, Dvorkin says.
Within 30 days, the IRS should tell you whether it has approved the plan or needs additional information about your finances. Typically, the process is easiest if you owe less than $25,000, Dvorkin says.
It works best if the person with the debt thinks clearly before contacting the IRS
about what he or she can reasonably afford and then suggests a specific amount,
says Tiff Worley, chief executive of Auriton Solutions, a Roseville credit counseling
firm.
If a debtor starts making those monthly payments immediately, instead of waiting
for the IRS's approval, that sometimes convinces the IRS that the taxpayer is earnest.
Even if the IRS lets a taxpayer take on affordable payments, however, the person
doesn't escape penalties and interest. The process is an expensive one that people
would be better off avoiding by paying taxes when they are due.
But Worley notes that people can apply for a rebate on the penalties — not the interest
— if the tax bill is paid in full within three years. (Penalties range from 0.5
percent to 1 percent a month, and interest is about 5 percent.)
Once an installment plan is in place, the IRS can cancel the arrangement if the debtor misses a payment or fails to pay new tax obligations. So, if you get the IRS to work with you, don't blow it.
