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Thread: Best way to pay tax debt

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    Default Best way to pay tax debt

    I am overwhelmed. Long story short, my husband and I owe about 40,000$ in income tax.What is the best way to take care of this?There is no way we are going to have 40 G's outright by October so I'm thinking... should we take some equity out of our home, set up a payment plan, or a combination. The payment plan sounded like a good idea but the intrest rates are high and I dont want to be stuck paying for years. This is an area that I'm really not knowledgeable in so any help would be greatly appreciated.

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    Default Re: Best way to pay tax debt

    I'm not really familiar with the IRS' payment plans or interest rates, but here's something to take into account...

    You may be able to get a lower rate on a home eq line of credit on your house, but remember you need to factor in closing costs, etc. to see if it would REALLY save you money. Also, I don't know how long you've owed the taxes, but if the IRS has reported them to your credit report, it could cause you to have a higher rate should you choose to take out equity on your house.
    I believe you Dottie and you have my support

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    Default Re: Best way to pay tax debt

    the normal interest rate charged by the IRS for tax deficiencies was raised to 8% at the end of 2006. It is the fed funds rate plus 3%, and apparently gets readjusted every 3 months. See

    Also, up until the time that you either pay the IRS in full or enter into an installment agreement with the IRS, you are potentially subject to an additional 1.5% per MONTH penalty. In other words, if you owed the IRS $40,000 last april 15th, the IRS will in all likelihood have tacked on another $600 in penalties for every month that has passed since then.

    The IRS has available both a normal 'installment agreement' and a 'partial payment installment agreement' - see

    With $40k in tax liability at stake, it might very well be worth an attempt to make an 'offer of compromise' to the IRS - see . However, only 16% of taxpayer submitted 'offers of compromise' are actually accepted by the IRS.


    In regard to home equity, depending on how far your tax delinquency has progressed, it may not be possible for you to arrange a home equity loan if the IRS has already filed a tax lien on your property which impairs a potential lender's right to foreclose on the collateral should you go belly-up on the home equity loan. However, if no such IRS tax lien has yet been filed, going the home equity loan route to pay off the IRS does have one HUGE advantage. If your financial troubles were to get even worse in the future, it is possible to go bankrupt on a home equity loan, but it is NOT possible to go bankrupt on back taxes. From a cost standpoint, you'll have to compare an 8% 'variable rate' installment agreement with the IRS against whatever home equity loan or home equity line of credit interest rate you are offered. Per various websites the going rate for fixed interest rate home equity loans is now running around 8.1% (interest only, not counting 'closing' costs).

    Also, in the absence of a valid IRS agreement to the contrary, the IRS can continue to tack on a 1.5% penalty every month to the outstanding balance of unpaid tax liabilities if they want to be buttheads about it. In a worst case scenario this would mean that the first $600 or so in monthly payment to the IRS would only go towards paying the penalty, with anything paid over and above the $600 actually being applied to the back tax liability and interest charges. In this scenario you may wind up paying $100,000 total to resolve a $40,000 back tax bill. In comparison, paying off the IRS in full via the proceeds from a home equity loan or home equity line of credit brings all IRS penalties, tax liens, and IRS interest charges to a nearly immediate halt.

    Just my personal opinion, but I would attempt an 'offer of compromise' ... and if rejected, I would use whatever source of bank financing I could find (even a 9.9% credit card if necessary) to avoid being entangled with the IRS via an installment agreement. IMHO The worst part of IRS installment agreements is a 'mandatory' provision giving the IRS absolute permission to investigate your personal finances both initially and at any time as long as the agreement is still in effect (i.e. as long as any of the back tax balance remains unpaid). Another sucky mandatory provision is that the IRS has the right to 'adjust' your payment schedule unilaterally if your earnings vs expenses picture changes in the future. And if you were to enter into an IRS agreement and breach the payment terms for any reason, consider yourself toast i.e. a 'former' homeowner ! It is a near certainty that breaching an IRS agreement will provide the IRS with just cause to seize and liquidate your assets to effect an immediate repayment of the back tax liability, at whatever valuation levels are necessary to effect a quick auction sale.

    ~
    Last edited by Melonie; 07-31-2007 at 04:15 PM.

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    Default Re: Best way to pay tax debt

    Melonie, thank you soooooo much!!! The good news is the taxes are not delinquent, we filed an extension in April of this year so they will be due in October. I think we will be able to get a pretty decent rate on a home equity loan as my credit score is pretty good. After reading your info, I have more research to do but the installment agreement is looking less attractive, I would really like to avoid the IRS having such intimate dealings in my personal finances.

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    Default Re: Best way to pay tax debt

    Get a tax attorney. They can often negotiate with the IRS to reduce large sums; you might be able to cut that bill in half. With a bill that large, I would advise against dealing with the IRS on your own!

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    Default Re: Best way to pay tax debt

    The good news is the taxes are not delinquent, we filed an extension in April of this year so they will be due in October.
    Well, this isn't exactly true. By filing an extension you avoided a possible penalty for failure to file. However, you are not avoiding the monthly penalties or interest charges which have been added on by the IRS since April 15th because you still haven't paid them what you owe them.

    (snip)"Failure to Pay Penalty
    The failure-to-pay penalty is calculated based on the amount of tax you owe. The penalty is 0.5% for each month the tax is not paid in full. There is no maximum limit to the failure-to-pay penalty. The penalty is calculated from the original payment deadline (the original April 15th filing deadline) until the balance due is paid in full.

    Interest
    Interest is calculated based on how much tax you owe. Interest rates change every three months. Currently, the IRS interest rate for underpayment of tax is 8% per year. The interest is calculated for each day your balance due is not paid in full.

    Action Plan Items
    There's a lesson to be learned by looking at the penalties. If you owe, it is better to file sooner rather than later. Also, if it looks like you are going to be a few months late on your next tax return, file an extension. By filing an extension you may reduce or eliminate the Failure to File Penalty."(snip)

    from

    I'm in total agreement that taking out a home equity loan to pay off the IRS ASAP is a FAR better alternative than entering into a payment agreement of any kind with the IRS ... because doing so gives the IRS carte blanche to poke around your personal finances, previous years' tax returns, etc. on top of costing you more money in higher interest charges. To stop the IRS late payment penalties from piling up, and to stop the IRS charging interest on the interest, I would look into the home equity loan tomorrow and pay off the IRS before August 15th if possible. This would avoid yet another monthly 1/2% late payment penalty = $200 being added on August 15th (you've already been hit for three monthly penalties since April) and another 8%/365 = $9 a DAY of interest being added to your original $40k tax bill for every day the IRS has not been paid in full (you've already been hit with 100 odd days worth of interest charges Since April 15th too)!

    In other words, the $40,000 tax bill you owed to the IRS on April 15th has already turned into something close to $41,600 or so due to penalties and interest, despite the fact that you filed for an extension ...

    Get a tax attorney. They can often negotiate with the IRS to reduce large sums; you might be able to cut that bill in half.
    I'll be very honest here and again point out that, of all of the 'offers in compromise' submitted to the IRS last year to settle for less than the full value of back taxes, only 16% were accepted by the IRS. Of course these services are heavily advertised, but the examples you see on TV of a $200,000 business tax bill being compromised to $40,000 are extremely rare occurrences. Undoubtedly those submitted by an attorney have a better chance of acceptance than a taxpayer submitted offer, but that does not mean that every offer submitted by an attorney will be accepted.

    I am told that the IRS takes a few important factors into consideration when reviewing 'offers in compromise' ...

    - #1 is the offer coming from a business - such that accepting an offer of compromise this year might allow the business to stay in business thus providing jobs (and payroll taxes) and paying additional business taxes in future years, versus rejecting the offer and forcing the business into bankruptcy thus causing loss of jobs (and payroll tax revenue) plus the business not paying additional business taxes in future years ?

    - #2 in the case of a business or an individual taxpayer, does that entity already own sufficient fixed assets (i.e. property, investments) that could be liquidated to cover the back tax liability ?

    - #3 if the offer is coming from an individual, given that taxpayer's 'family income' and number of dependents, would the additional monthly payments necessary to pay off the full amount of back taxes over a three year period versus reduced monthly payments on a compromised amount of back taxes over the same three year period have an adverse affect on that taxpayer's ability to also provide for his family / children ( i.e. how close would the 'family income' minus IRS monthly payments come to the official 'poverty line') and/or cause versus avoid a bankruptcy filing by that taxpayer ?

    Again a personal opinion only, but if you already own sufficient assets to cover 100% of your back tax liability, and if your 'family income' would still remain above the official 'poverty line' with IRS monthly payments towards the full amount owed subtracted, and if your cash flow balance would not be at risk of pushing you into bankruptcy with IRS monthly payments towards the full amount owed being added to your existing debt burden, the probability of the IRS accepting an Offer of Compromise from you is pretty low.

    I have no problem with an attempt to prepare and submit an Offer of Compromise yourself - essentially all it will cost you is your time. However I question the wisdom of paying out thousands to an attorney to prepare and submit an Offer of Compromise on your behalf, unless your chances of acceptance are bolstered by meeting one of the above criteria.

    ~
    Last edited by Melonie; 08-01-2007 at 03:15 PM.

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    Default Re: Best way to pay tax debt

    Update- we are now thinking of taking out a home equity loan for 20,000 and paying the IRS immediately, then transferring that 20,000 to a low intrest credit card which can be done with the bank we talked to, and setting up an installment agreement for the rest. Reason being that by taking off 20,000 right now that puts us under 25,000 owed and if you owe less than 25,000 there is quite a difference in the terms of your agreement. The IRS is less privy to your financial statements and can't adjust your payments.That was the understanding I got from our accountant. Does that sound about right?

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    Default Re: Best way to pay tax debt

    Granted that even credit card interest rates are lower than the combined cost of IRS interest plus penalty charges.

    I really don't know about specific IRS procedures / requirements for different levels of back taxes, so I'll defer to your accountant that the IRS in regard to $25,000 forming some sort of threshold.

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