What to Do if I Can't Afford to Pay Federal Taxes
I just finished doing my families tax return with the old Turbo Tax software and now realize how utterly screwed we are. I work for a website as an independent contract. I have a salary paid monthly via personal check where taxes are not withheld. This is my first year, but I excepted I'd have to pay several thousand dollars to cover that from the year. But I just realized that I have a $9,800 tax burden I now owe the IRS on my federal return! When asked how I'd pay, I just selected the installment plan to simply buy me some time to not only get over the utter shock, but figure out how my family is going to survive this. We're not in debt and always manage our money responsibility, but this is just crippling to us and our budget (considering it's not just me, but my wife who is a stay at home Mom with no income and my two infant sons).
What do I do? The installment plan is only good once a year and next year I'm going to be hit with another 10k on top of this one, as I see it just mounting up. Is there any legal recourse or assistant I can get? I assume the IRS is not in the habit of just forgiving federal income tax debt. Needless to say, this will be devastating to my family to have this saddled on our back. The irony is the better job opportunity cut out a lot of tax breaks that would have helped, even though my income is not really that much different than last year (within a few grand).
Any advice on how we can better manage this sudden crushing financial burden is much appreciated!
Re: What if I Can't Afford to Pay Federal Taxes
Have you first availed yourself of the gold mine of deductions an independent contractor might be able to use before arriving at your taxable income?
I run two small businesses and have an accountant who will slap me silly if I even look like I'm going to take an illegal deduction, but the legitimate available write offs lower my gross income by a significant amount.
There is a tax attorney here who I suspect can provide you further assistance in that area.
Re: What if I Can't Afford to Pay Federal Taxes
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isitlegalmk
I work for a website as an independent contract. I have a salary paid monthly via personal check where taxes are not withheld.
You might be illegally classified as an independent contractor if you work for one employer and get paid a salary. But that's a problem for another day.
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isitlegalmk
This is my first year, but I excepted I'd have to pay several thousand dollars to cover that from the year. But I just realized that I have a $9,800 tax burden I now owe the IRS on my federal return!
Next year you'll know better than to wait for the last minute.
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isitlegalmk
What do I do? The installment plan is only good once a year and next year I'm going to be hit with another 10k on top of this one, as I see it just mounting up. Is there any legal recourse or assistant I can get? I assume the IRS is not in the habit of just forgiving federal income tax debt. Needless to say, this will be devastating to my family to have this saddled on our back. The irony is the better job opportunity cut out a lot of tax breaks that would have helped, even though my income is not really that much different than last year (within a few grand).
L-1 is right. You might have a bunch of business deductions available to you for which you can file an amended return as soon as you figure it out.
Start by studying IRS Publication 334 Tax Guide for Small Businesses.
https://www.irs.gov/pub/irs-pdf/p334.pdf
Then look at Schedule C and it's instruction booklet:
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
https://www.irs.gov/pub/irs-pdf/i1040sc.pdf
Self employment tax:
https://www.irs.gov/pub/irs-pdf/f1040sse.pdf
https://www.irs.gov/pub/irs-pdf/i1040sse.pdf
Once you have read all that stuff you would be wise to hire a tax pro to thoroughly review your business paperwork and create your amended return. If you are lucky you might cut that tax bill in half.
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isitlegalmk
next year I'm going to be hit with another 10k on top of this one,
Not if you pay quarterly estimated taxes.
https://www.irs.gov/pub/irs-pdf/f1040es.pdf
Your first quarterly payment is due today so you're already in the penalty phase so I suggest you get to work on figuring out how much you need to send every quarter and then just bite the bullet and do it. Otherwise you'll really be in a bind next year.
If you think your tax bill is going to be $10,000 next year then you need to send $2500 each quarter. Though I suggest doing your amended return for 2016 ASAP as it might be a lot less.
Re: What to Do if I Can't Afford to Pay Federal Taxes
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isitlegalmk
I just finished doing my families tax return with the old Turbo Tax software and now realize how utterly screwed we are. I work for a website as an independent contract. I have a salary paid monthly via personal check where taxes are not withheld. This is my first year, but I excepted I'd have to pay several thousand dollars to cover that from the year. But I just realized that I have a $9,800 tax burden I now owe the IRS on my federal return! When asked how I'd pay, I just selected the installment plan to simply buy me some time to not only get over the utter shock, but figure out how my family is going to survive this. We're not in debt and always manage our money responsibility, but this is just crippling to us and our budget (considering it's not just me, but my wife who is a stay at home Mom with no income and my two infant sons).
What do I do? The installment plan is only good once a year and next year I'm going to be hit with another 10k on top of this one, as I see it just mounting up. Is there any legal recourse or assistant I can get? I assume the IRS is not in the habit of just forgiving federal income tax debt. Needless to say, this will be devastating to my family to have this saddled on our back. The irony is the better job opportunity cut out a lot of tax breaks that would have helped, even though my income is not really that much different than last year (within a few grand).
Any advice on how we can better manage this sudden crushing financial burden is much appreciated!
The reality is that you must pay your taxes. If you are not paid enough that you can both live and pay your taxes on the amount you make, then you need to find a different job. Preferably one where the employer withholds taxes.
Re: What to Do if I Can't Afford to Pay Federal Taxes
When you are self-employed (which includes being an independent contractor) then you are responsible for making all the tax payments you owe for the income you are making from the self-employment since no one withholds that tax for you. This includes not just income tax, but also your Social Security and Medicare taxes (together known as FICA taxes). A lot of self-employed people when they first start out overlook the FICA taxes because as an employee they never had to deal with those. The problem with FICA tax is that, unlike income tax, there are no non-business deductions that reduce it. So even if you can reduce your income tax on the business quite a bit with personal deductions, it does not help with the FICA taxes at all. This can lead to much higher tax bills than the taxpayer expects.
Some others here have suggested you look at all the business deductions you could take to reduce the business taxable income, which of course is a good thing to do since it will reduce both your income tax and FICA tax. But since you used turbo tax you should have already taken most of those into account as that program does a pretty good job of prompting you for the various deductions, etc., that you may be eligible to take, especially if you used the more robust version of the program for sole proprietors. So I assume you did that already.
Getting the installment agreement is good first step in resolving the balance due for this year. Getting an installment agreement now cuts your late payment penalty in half and ensures you won’t have to deal with ongoing collection efforts by the IRS, which get increasingly more agressive the longer the tax debt goes unpaid and ignored by the taxpayer. For this year and future years you need to start setting aside the money to pay the tax and remit them in estimated payments to the IRS. Form 1040-ES is used to do that. The instructions for the form explains how it works and has a worksheet to help you get the estimates right. Turbo tax can do the estimates for you, too, and print out the payment coupons you need to use for the estimated payments.
You are correct that the IRS does not often simply forgive (what the tax law refers to as “compromise”) a tax debt. It does have an offer-in-compromise (OIC) program in which it will sometimes settle a tax debt for less than the full amount owed based on the taxpayer’s inability to pay. But if you are able to fully pay the debt through an installment agreement you would not be eligible for that relief. The basic rule of thumb for an OIC is that the taxpayer must offer more money than the IRS could ever possibly collect from the taxpayer before the statute of limitations to collect runs out for the IRS to accept the offer. This usually means having relatives, friends, or some other outside sources that are willing to help you fund the offer.
Re: What to Do if I Can't Afford to Pay Federal Taxes
Taxing Matters really hit the nail on the head of much of the info I was given today by a tax professional I hired. I'll give the bullet points of all the info and we'll go from there:
- The good news is she was able to find a few other home office deductions on things like utilities and various job-related items in my amended return, which did drop it down another $1,100. So the new federal total is right around $8,700
- The bad news is she also processed my local and found out I owed them over $1,000 which I had not accounted for, so that savings went out the window unfortunately
- She said being an independent contractor is one of the negative side effects she sees due to the bad economy. If I were to get a job that is W-2 based, that would cut my burden down drastically. But right now, my employer is forcing me to fit the entire FICA bill
- She also advised me about getting the quarterly payments made, which she says is a shock to most first time contractors like myself who are never told by their employer or anyone about the huge financial burden we're about to undertake. This really should be part of some sort of high school or college course where they warn people about the dangers of working for yourself
- She also mentioned the OIC, but told me something crazy about. She said I'd have to send in a payment with the application blindly without any notion of whether they will accept it or not. If they don't, they just keep the money. if that's true, that is some crazy mafia stuff going on with the IRS right there!
So my only recourse now it to contact the IRS and see what my options are. If the OIC doesn't work out, is there any legal help or financial assistance I can seek outside the IRS? I own this mistake, but I don't think anyone would deny that jumping from a $450 payment last year to $10,000 is reasonable by any standards. I mean, I'm willing to keep up with it moving forward and do what I have to do, but that past debt it what's killing us.
Re: What to Do if I Can't Afford to Pay Federal Taxes
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isitlegalmk
She also mentioned the OIC, but told me something crazy about. She said I'd have to send in a payment with the application blindly without any notion of whether they will accept it or not. If they don't, they just keep the money. if that's true, that is some crazy mafia stuff going on with the IRS right there!
Congress more than two decades ago passed an act that required certain federal agencies, including the IRS, to charge fees those using optional services the agency provides to them to in order reduce the burden on the general public in paying for this stuff. Installment agreements and the OIC program are not mandatory programs; the law does not require the IRS to offer them. As the taxpayer is supposed to pay the full tax by the return filing deadline, no taxpayer who complies with that requirement would ever need to use them. So these services are optional and the IRS must charge a fee that is supposed to reasonably cover the cost of processing those requests, whether the request is ultimately granted by the IRS or not. Put simply, this fee is there because Congress mandated it, not because of some choice by the IRS.
Re: What to Do if I Can't Afford to Pay Federal Taxes
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isitlegalmk
Taxing Matters really hit the nail on the head of much of the info I was given today by a tax professional I hired. I'll give the bullet points of all the info and we'll go from there:
- The good news is she was able to find a few other home office deductions on things like utilities and various job-related items in my amended return, which did drop it down another $1,100. So the new federal total is right around $8,700
- The bad news is she also processed my local and found out I owed them over $1,000 which I had not accounted for, so that savings went out the window unfortunately
- She said being an independent contractor is one of the negative side effects she sees due to the bad economy. If I were to get a job that is W-2 based, that would cut my burden down drastically. But right now, my employer is forcing me to fit the entire FICA bill
- She also advised me about getting the quarterly payments made, which she says is a shock to most first time contractors like myself who are never told by their employer or anyone about the huge financial burden we're about to undertake. This really should be part of some sort of high school or college course where they warn people about the dangers of working for yourself
- She also mentioned the OIC, but told me something crazy about. She said I'd have to send in a payment with the application blindly without any notion of whether they will accept it or not. If they don't, they just keep the money. if that's true, that is some crazy mafia stuff going on with the IRS right there!
So my only recourse now it to contact the IRS and see what my options are. If the OIC doesn't work out, is there any legal help or financial assistance I can seek outside the IRS? I own this mistake, but I don't think anyone would deny that jumping from a $450 payment last year to $10,000 is reasonable by any standards. I mean, I'm willing to keep up with it moving forward and do what I have to do, but that past debt it what's killing us.
I am truly sorry, but there is no financial assistance or legal help that can reduce your tax and/or make it go away. You can get a loan from somewhere to pay off the IRS or you can go on an installment plan with the IRS (they will go out to 72 months). Those are really your only options at this point.
Re: What to Do if I Can't Afford to Pay Federal Taxes
I wanna thank everyone for the expert advice, it has really be appreciated. And after a few days to process all this, I've come to terms with this is just a horrible learning experience that I'll now have to weather. This has shown me just how bad being an independent contractor can be, especially if you're not prepared or informed of the pitfalls ahead of time. The only way I know to handle this without becoming a huge financial burden on the family is to take the full 72 month term in order to keep the payment low. I'm already going to have to pay around $700 a month to the IRS to keep up with my quarterly taxes moving forward, so with this on top of it I'm going to be around $900-$1000). Or in other words, I just doubled my mortgage costs per month. Not an easy thing to handle, but it is what it is.
Does anyone know what I can expect to pay on a $8,700 installment plan spread over 72 months in fees, interest and penalties? I'd at least like to be prepared.
Re: What to Do if I Can't Afford to Pay Federal Taxes
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isitlegalmk
Does anyone know what I can expect to pay on a $8,700 installment plan spread over 72 months in fees, interest and penalties? I'd at least like to be prepared.
There are two things that get added to the balance due while you pay off the tax liability. One is the late payment penalty. When you enter into an installment agreement before the IRS sends you a notice of intent to levy (what the IRS calls the final notice) your late payment penalty is quite low, just ¼% per month, or 3% per year. That penalty is computed on just the outstanding tax portion of the liability and is not compounded. The second addition is interest. Interest runs on the entire balance owed (tax, penalty and interest) and is compounded daily. The interest rate can change each quarter depending on the change in short term federal rates. Currently the interest rate is 4%. Since it compounded daily, that works out to be an annual effective interest rate of 4.08%. So, as a rough approximation you can figure that the penalty and interest together are running at about 7.08% — that’ll be a bit a high, but will give you a general idea of what you are looking at.