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Lessons Learned in Helping People Pay Off Six Figures of Tax Debt


Observations about helping people pay off six-figure tax debt. 

A while ago, I wrote a case study article about my first big clients, who were overwhelmed in tax debt.  They came to me because they had depleted their retirement savings and no one else would consider working with them.  Although they’re much better off today, it was a bumpy road, and you can read more about how they paid off their $140,000 in IRS debt here. 

Since then, I’ve gotten many phone calls and emails from people around the country asking me for advice about similar situations.  Over the past few years, I’ve learned a couple of things, and figured I’d share those observations with you in this article.   

Observation #1:  Many people think that hiring someone will take care of the problem.  There are several reasons why this is usually untrue. 

First of all, as long as your tax issues remain in the administrative world (i.e. you’re not going to court with the IRS), there is nothing that any paid professional can do for you with regards to your tax debt, that you cannot do for yourself.  Understand that.   

While the tax code is very confusing, and the IRS isn’t very popular, there are a slew of resources available to you.  For free.   

The most significant is the Taxpayer Advocate Service, which solely exists to help you, the taxpayer, navigate the IRS’ bureaucracy.  It’s funded by taxpayer dollars, and is 100% free for any taxpayer, regardless of their situation.  In fact, you need to know nothing about your situation, other than how to contact your local Taxpayer Advocate Office, and they will walk you through what you need to do to get back on track.   

I’ve recommended this as the first step for everyone to try for several reasons: 

  • The Taxpayer Advocate Office has access to the exact information that the IRS’ collections office does.  That means they can give you up-to-date information on your total liability.  This is more than your accountant or tax lawyer can do for you.  
  • The Taxpayer Advocate Office knows the IRS rules and procedures better than most tax professionals.   
  • When you talk with the Taxpayer Advocate Office, notes are kept for future reference.  This is to your benefit.   

For example, when my client agreed to a repayment plan, it was for a lump sum payment, followed by a 72-month monthly payment plan to be auto-debited from her bank account.  Since the balance (after lump sum payment) was less than $50,000, the IRS was not supposed to place a lien on their property.  They did anyway.  When this happened, we called the Taxpayer Advocate Office, who referred to the notes (which clearly indicated that there was to be no lien, according to the agreement), and the lien went away.   

If you do insist on paying someone to help you, there are probably three main ways they can help you: 

  • Offer in compromise.  Offers in compromise (OIC) generally are an offer to the IRS for less than the full value of your tax debt.  There are many firms that ‘specialize’ as tax settlement firms.  They boast about being able to help clients with offers in compromise, and usually make their money by collecting a flat fee up front.  Be forewarned that the ‘tax settlement’ industry is fraught with misrepresentation and underperforming firms.  According to the IRS Data Book for 2017, the OIC acceptance rate was 40%, with an average dollar amount of just over $10,000 for accepted offers.  If you’re struggling with six-figures of tax debt, you’re probably not going to want to go through the ordeal of an OIC, trust me.  As a side note, I personally do not help people with OICs.       
  • Finding an error.  Odds are, if you’re dealing with six-figures of tax debt, there’s something more than a tax mistake at hand here.  Every person I’ve met with six-figure tax debt has had: 
  • Multiple years of ‘problematic tax returns.’  To me, problematic tax returns could be ones that result in significant amount of taxes owed, or ones that simply weren’t filed at all.  It’s not uncommon for people to have not filed tax returns for 5 or 6 years (or more).   
  • Relatively high taxable income.  Let’s face it.  If you’re making $40,000 per year, an error in your tax return is going to be a couple grand.  Max.  Your accountant isn’t going to call you and tell you that you owe $100,000. 
  • Giving you their time.  Unless you’re going to court (and even then), anyone you hire to help you navigate this process is giving you their time.  Whether it’s time spent building a legal case, or time spent on the phone calling the IRS on your behalf, your tax professional is counting the time they spend on you.  And it might be worth it for the peace of mind.  However, just know that a lot of what that professional is taking credit for---it’s mostly things you could do yourself. 

A classic example is the ‘penalty abatement.’  Many law firms and ‘tax specialists’ claim that they have the secret recipe for getting penalties removed.  Below are verbatim claims from tax lawyer websites that I found in a quick Google search: 

  • “XXX will work with you and make payment arrangements that the IRS will allow.” 
  • “If there were circumstances beyond your control that prevented you from paying your tax debt and led to delinquency, we are able to challenge the penalties that have built up.” 
  • “An experienced attorney should be able to help assess your situation and come to a solution that works for you, as well as the IRS.” 

Here’s a secret—you can do much of this yourself.  For example, the IRS’ First Time Penalty Abatement Policy erased my clients’ penalties (over $10,000 in accrued failure to file & failure to pay penalties).  All of this information was free on the website, and the Taxpayer Advocate walked my client through the steps. 

You can hire a tax lawyer or other professional to walk you through this (or even do it on your behalf with a power of attorney using Form 2848, Power of Attorney and Declaration of Representative).   Just know that you don’t HAVE to hire someone to do this for you.   

If you do want to hire someone, you ask for a free initial consultation, which most reputable tax experts provide.  Go over their proposal, then think on it.  Call the IRS’ Taxpayer Advocate and go over the proposed plan.  If it sounds fishy, they’ll probably let you know what suspicions they have and recommend that you see a different tax professional.    

Observation #2:  Accumulating six-figures of tax debt didn’t happen overnight.  It won’t get fixed overnight, either. 

Most of the people I’ve talked with had accumulated their debt over multiple years.  There doesn’t seem to be a single reason.   

For example, one person was in a professional partnership and didn’t know how partnership distributions were taxed.  This problem compounded when they started their own company and neglected to pay employment taxes for several years.  In another case, someone simply owed a lot of money after one year, which snowballed and progressively got worse each year afterwards.  A third person simply didn’t file tax returns for 6 years. 

Whatever the cause, taxes appear to be one of those problems that poses an almost existential threat to one’s livelihood.  In reality, most cases involving the IRS are pretty easily resolved, particularly if there is a mistake made in preparing the tax return in question.   It even happened to me once, a few years after college.   

I had cashed in some EE savings bonds (the interest was not tax-exempt because I the proceeds did not pay for my college education).  However, I forgot to include the interest as income in my tax return.  The bank where I redeemed the bonds reported my income, so the IRS noted this discrepancy.  About two years later, I got a letter from the IRS notifying me of this discrepancy.  I called the examiner’s office, and she politely explained the situation:  how much tax I owed, and the accumulated interest and penalty.  I paid the balance and the issue was resolved.  Lesson learned from my mistake.    

While people do go to jail for tax evasion or tax fraud, this is not a likely scenario for people who decide to take charge of their situation and get back on track.  Despite what people might think, the IRS doesn’t care about taking your house or your car…it simply wants the money that you owe the federal government.   

However, many people get stuck at the first part.  And when it’s not resolved the following year, it becomes a little worse.  Each year, it gets worse and worse.  At some point, it becomes a focal point in your life.  All because of that first step. 

Observation #3:  Many people are too scared to take the first step.  As a result, their situation gets worse and worse. 

In my case, it was easy to take the first step.  After all, I had made a mistake, which was explained clearly to me.  I had the money to pay the debt, so I did. 

But for many people, it’s not that simple for a couple of reasons.  

  • There’s a delayed response.  If you’re like most people, you wait until mid-March or later to file your tax return.  You rush to get everything to your tax preparer, wait for the refund, and then…nothing.  You have no idea whether your tax return was proper or not.  In normal circumstances, the IRS won’t audit a return for a year or two after it was filed.  It’s easy to forget what happened two years ago. 
  • The new tax liability might not be clearly understood.  In my case, I forgot to claim income that I clearly had.  However, with the complexity of the new tax law, it’s pretty easy to empathize with a taxpayer who doesn’t understand what’s going on. 
  • You might not have the money to pay.  Even if you understand why your tax bill was adjusted upwards, you might simply not have the money to pay.  While the IRS does have avenues to help make payments easier for you to make, the onus is still on you to make the effort.  Which doesn’t help when you feel like you’re already drowning in money problems. 

In some cases, people disregard the problem, thinking that it will go away.  It doesn’t.  But it’s easier to ignore the problem than to take the first step in fixing it. 

Observation #4:  The first step is the hardest. 

Isn’t this a tired cliché?  Just because it’s tired doesn’t mean it’s not true.  Most of the people I’ve talked with have been stressed about their tax situation for years.  And in no case has the problem gotten better over time. 

Observation #5:  Just because the first step is the hardest doesn’t mean that it’s smooth sailing afterwards. 

After the first phone call to the IRS, people usually learn a couple of things: 

  • All this time, there has been this tax problem that they’ve been dreading, that has almost paralyzed them for so long.  But there’s a person on the other end of the phone who deals with this day in, day out, as their full-time job.  And unless you’re Wesley Snipes, your case is probably not the worst thing they’ve ever seen. 
  • There is a very deliberate collections process that the IRS follows.  It doesn’t start with taking your house.   
  • Being proactive does help you clarify mistakes that the IRS might make along the way.   

With all this said, you can’t always just make a phone call, get the info you need, and move on.  If you’re dealing with six-figure tax debt, expect to do some heavy lifting.  And this is where you need to pay close attention to your options.  Because you do have some.   

But expect to do some work.  Also, understand that the less money you say you have in relation to your debt, the more you can expect the IRS to be snooping around in your business.  In other words, embrace the suck. 

Observation #6:  At some point, you do see the light at the end of the tunnel. 

Once you’ve made some progress (which usually consists of paying a lump sum and negotiating a payment plan that the IRS accepts), it’s okay to feel a sense of accomplishment.  While you might not have paid 100% of the debt, having a debt payment plan in place and having your penalties abated is usually worth celebrating (in moderation).  At that point, you might wonder what’s next. 

Observation #7:  After the entire ordeal is over, it might be worth hiring someone you trust to keep you on track going forward. 

Some people see their tax debt as a one-time blip which they struggle through and learn from as they move forward.  Others might feel as though they’d like to have a professional guide them through major tax and financial decisions in the future.   

Conclusion

Many people hire a financial professional even though they feel they can do everything themselves.  However, having a professional relationship allows you to make objective decisions with confidence that you won’t stray too far off your financial journey again.  If that’s how you feel, then a good financial planner is definitely worth their fee.   

If you feel you can use guidance with your finances, some great ideas to improve your financial life, and a partner who wants to help you succeed, come visit us at Lawrence Financial Planning. Find us on all social media or shoot us an e-mailWe're here for you now and years from now.  


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