I have helped a considerable number of clients resolve their back taxes. One thing that surprises most of my clients is the sheer amount of taxes, interest, and penalties owed. How do people get into this situation? Owing taxes can be compared to a snowball that starts to roll from the top of a hill and gets increasingly larger as the snowball progresses down the hill toward the bottom. Given a long ride, that snowball gets too big to handle. The following narrative, which includes name and location changes to protect client confidentiality, demonstrates how back taxes can erupt out of control.
Sally is a single parent of two children. She works at GM and makes about $60,000 a year. In 2006, Sally had very nasty divorce that left her emotionally and financially devastated. She was barely functioning. Managing her household, children and job used all of her energy. To get caught up on her household bills, she adjusted the exemptions she was claiming to 12. Therefore, GM withheld lower taxes from her paycheck, and she was able to use the extra money. Sally figured that she would just pay off any taxes owed when the 2006 tax return was due. When it was time to file her 2006 return, Sally did not file. She knew that she owed taxes, but she simply did not have the money to pay. Being emotionally overwhelmed from the divorce, she barely had the energy to even think about taxes.
In 2007, Sally's parents were involved in a very serious accident. Her parents survived but her father was permanently disabled. This was a very stressful time for Sally. She was visiting her father in the hospital at least 3 times a week for 4 months. She also spent a lot of time helping her mother cope with the aftermath of the accident. When her 2007 taxes were due, she did not file. She really could not deal with the taxes right then, but she knows that her tax obligations have to be addressed sooner or later. She is relieved to not have heard anything from the IRS.
By 2008 Sally's life starts to get back on track. She felt that the worst was behind her and excited to be moving forward. Her financial situation was getting a little better, but it was still tough. She was uneasy about her back taxes. She knew that she should be filing her returns but it was not a good time for her. She was just getting financially ahead and did not want to get bogged down with tax stuff. Sally still had not heard anything from the IRS, so she assumed that the taxes were not a huge issue. She had other important things to attend to such as her children's education, her job, and helping her parents.
For 2009 and 2010, nothing really changed. Like all her friends, she was just trying to make ends meet. She still has not filed her returns. But again, she has not heard from the IRS either.
In 2011, Sally received a letter from the IRS. She did not fully understand the letter, but she clearly understood that the IRS was saying that she owed $45,000. At this point, Sally's heart just dropped and her mind started racing. How in the world can I ever pay this back? There is no way I owe this much. How could this be? Who can I even talk to? This is so embarrassing. Before 2006, I made sure all returns were filed and taxes were paid. This is terrible, I need help.
Sally hired ALG Tax Solutions for resolution. The first thing we did is file IRS form 2848, Power of Attorney and Declaration of Representative, with the IRS. This action allowed us to gather all of Sally's account information with the IRS. Upon receipt of Sally's IRS account information, we noticed the following:
1) The IRS filed a substitute for return (SFR) for tax years 2006, 2007, and 2008. An SFR is filed for you by the IRS because the required annual tax return was not filed. Click here to understand more about SFRs.
2) The taxes owed for 2006 through 2008 is about $45,000. The amount is high due to Sally not filing her required annual tax returns, plus penalties and interest.
3) Sally was not withholding enough taxes from her wages. She never lowered the amount of exemptions she was claiming.
The first two steps for addressing Sally's tax problem are one, lower the wage exemptions she is claiming from 12 to 2 or 3; and two, file all her back tax returns. By filing her delinquent tax returns, Sally's tax debt was reduced from $45,000 to $25,000. Her tax debt was reduced because she was able to file as head of house hold, claim her dependents, and claim all eligible deductions.
After Sally's tax returns were filed, we suggested the following.
1) Request abatement of penalties due to reasonable cause. This may further reduce her tax liability. However, the IRS may determine that she had reasonable cause to abate penalties for 2006 and 2007 only. These are the years she went through her divorce and dealt with her parents' serious car accident.
2) Review her case for an offer in compromise (OIC). She may be eligible to settle for an amount less than she owes.
3) If she is not eligible for an OIC settlement, set up an installment agreement with the IRS to pay off the balance owed over a 6 year period.
Getting Sally's delinquent tax issues resolved was a huge relief for her. She appreciated all the work ALG Tax Solutions did for her. She understands that the timely payment taxes owed should be the last thing she puts on the back burner.
Do not let this happen to you. If you have not filed an annual tax return, call ALG Tax Solutions now before your taxes become an overwhelming out-of-control snow ball. 855-MI-TaxHelp (855-648-2943)
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.