Okay, my daughter dropped this bomb on me today. Some years ago, when she was in morning over the death of her brother, she neglected to file her federal taxes for two years, and then never got around to making it good. The IRS has finally caught up to her and wants some $40K in payment and interest, which she doesn’t have and will likely never have. She’s freaking out, of course.
Facts: single mother in her 50s, no alimony, no child support, low-paying job, no property and no money in the bank.
I know that the IRS will take payment over time, but for her that would probably take the rest of her life.
What are her options? Will the IRS give any relief?
The obvious question - how did she rack up $40,000 in 2 years with no serious income?
I suppose the first thing to do is to actually do her taxes. I assume the IRS does not figure in things like child deductions, etc. Considering interest rates the last few years until this last one, it can’t be that much.
My daughter and her husband chose to not to file taxes for 7 years till the IRS dropped the hammer. They listened to some guy they knew that told them the government does not have the authority to make anyone pay taxes. The both found their paychecks garnished for the back taxes, the IRS took over half their take home pay. They called a company that advertises on TV. For the little over $6,000 they would have paid in taxes over the 7 years, they owed over $33,000. It took a combination of filing a chapter 13 bankruptcy and getting a forgiveness to reduce the amount to about $15,000. Together they are paying about $300 a month and will so for another 5 or so years. I think the company they used was Optima Tax Relief.
She needs to talk to a tax attorney. The IRS will almost always settle for a much smaller amount. But she has to get on it right away, before more penalties are assessed and wages garnished.
Most people get a refund when they pay taxes because the withholding from their paycheck is more than they end up owing when they file their taxes Do you know the breakdown of the 40K? How much is back taxes, how much is interest, and how much is penalties? With an amount that high, it almost seems like she wasn’t having any withholding taken out.
Sorry mistype - were it me, I’d make an appointment with an enrolled IRS agent to figure out my best option. I’d set a zoom session and give my account balances to them for verification.
I’d talk to an enrolled agent for infirmation, but I’d go with a tax attorney who knows the IRS ropes better.
I’m basing this on a previous job where the owner owed over $100k in back taxes, interest, and penalties. I had an enrolled agent at the time as our CPA and that was his advice.
I’ll suggest these things to her. Honestly, I’m still shell-shocked by her admission and how clueless she was about the consequences of tax fraud (which is what failure to file is considered to be). We both urged her to get on this immediately before really bad things start to happen. If they start garnisheeing her wages, she’ll be homeless. The enrolled agent sounds like a good idea. I have a feeling I’m going to have to help her pay for the that.
No idea. I haven’t seen what she was sent or anything else. She just dropped this bomb during a visit this afternoon.
She needs a tax attorney and it’s going to cost her some money, unfortunately.
The IRS will probably settle and she will have to pay over 72 months. If she misses a payment they will take drastic measures.
I say this on the strength of too many experiences with friends and family who have been in similar circumstances and tried all kinds of DIY measures (including doing nothing) and they all got nowhere until they engaged an attorney.
I just got off messaging with her and emphasized the need to take action immediately before shit gets real. I think she will. There are several enrolled agents in her area and I would think they’re cheaper than a tax attorney.
Or, potentially, she was self-employed or something like that at the time, in which she didn’t have an employer automatically taking taxes out of her pay, and then she wasn’t filing her quarterly estimated taxes. (Obviously, @Chefguy likely doesn’t know any of those details at this point.)
Yes, they’re cheaper up front, but I’d still want to end up going through a tax attorney. Or at least have one session with one to get their advice.
FYI, for anyone who doesn’t know,
An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.
My tax person is also an enrolled agent. She has a lot of experience handling these types of cases, where the issue isn’t a difference of interpretation of a complexity in the tax code.
My sister also didn’t pay taxes for a few years and, as may be the case with the OP’s sister, when letters from the IRS showed up, she didn’t open them, just stuck them in a drawer. By the time my other sister found this out (helping sort out her retirement), she owed north of $20,000.
I put my tax person on it and she managed to convince the IRS that my sister was unable to pay anything (retired on SS only, owned no significant property) so pursuing this debt would not result in any financial benefit to the IRS. The IRS put the debt in abeyance (not sure what the correct term is but that’s the effect). They will not try to collect unless my sister’s circumstances change (like if she wins the lottery, I suppose). This was ten years ago.
This cost me ~$2K, but if my sister had approached her as an indigent stranger, it would have been a lot less, because my tax person does a certain amount of “pro bono” tax work for those who can’t afford it, especially the elderly.
If the OP’s sister can find a place that helps the indigent with taxes, they may be able to help for much less than a business or individual of means might expect to pay.
I likewise find it hard to believe that she owes that much even with penalties and interest. Since she did not file, can she recreate her tax liability from that time to counter how much the IRS claims she owes?
I think that depends on how long ago this was. I wouldn’t think someone with a low income would owe $40K for not filing for two years five years ago - but if she’s in her 50s, it could have been thirty years ago.
I have no idea at this point, as she wasn’t specific. It was when her brother was still alive and she was dealing with his alcohol issues, so it could be any time prior to 2018. I’m sure I’ll find out eventually. If I’m dragged into this to help pay her agent/attorney, then I’ll make sure I’m fully in the loop. My daughter has a long history of embellishing the truth (or just outright lying about things), so for all I know she failed to pay her taxes for several years instead of just two. That will be a whole other conversation for us.
Do you know anything about her work history? Was she self-employed or did she have a traditional W-2 job? If she had a traditional job, then perhaps she set her number of dependents very high so that her withholding would be minimal.