What happens if you don’t pay taxes? The IRS, or FTB, writes to say you owe and you concede the amount. To remind us all that taxes are compulsory and no say on expenditures, the IRS can prosecute for tax fraud, but courts and jail cost the government money, so trials are uncommon.
The IRS probably jailed actor Weslie Snipes because he publicly advocated an unauthorized tax shelter and jailing a public figure quickly discredited the shelter. Drug dealers may have trouble hiding money and spending it simultaneously, so they get jailed. Garnished wages, hobbling liens on property and levies from banks and brokerages—SURPRISE!—are far more common and profitable to the IRS.
Immediate payment makes the IRS go away, but some qualify for one-time penalty abatement or innocent spouse relief. More filers need 2024 IRS payment plans with 1/4% interest per month. With no agreement, late filing penalties are 5% and payment penalties are 1/2% per month capped at 25% plus ongoing interest of 8% per year.
Direct debits are mandatory if you exceed a $25,000 debt. For installments over $50,000, fill out Form 9465 and the lengthy form 433-F to post every asset and source of income the IRS might seize. You may be paying for years, and the IRS deal is off if you fail to pay future taxes and estimated taxes. Still, it is better to pay than hide in Uruguay!
But what if your grave is too deep? To avoid liens, harassment and credit loss, Offers in Compromise are the last defense before bankruptcy, and they generally can only be won with special circumstances or debts too big to pay in six years—and good paperwork. Be wary of shady firms that claim IRS debt relief when you can’t meet these standards or pay their fees.
Consider some cases:
- The dilatory dentist accumulated IRS debt of $200,000 and then suffered a stroke, which instantly removed his earning capacity. The IRS quickly conceded “Doubt as to Collectability” and let him settle for $6,000.
- Poor Lisa watched her military husband shoot himself. The husband had amassed $120,000 of IRS debt and a $150,000 life insurance policy. She could pay the IRS, but that would leave her nothing to start a career and raise her kids. So I argued that she had “special circumstances” where full payment would cause “economic hardship.” The IRS agreed to an $8,000 settlement: recovery with child raising followed.
- Realtor Ralph boasted five rental houses. Success brought him to meth and meth brought him down in decreasingly coherent tax returns. He sold rentals, then his personal home and moved to a shack in the Philippines where elderly parents helped him recover. I was hired to redo 12 years of botched tax returns and discovered a quarter million dollars of taxes not really owed. For the extra $600,000 tax debt, penniless Ralph settled for pennies on the dollar—and this must be paid by others. A few years later, he sold California reality.
Bankruptcy will likely wreck a person’s credit for at least seven years, making it hard to get houses, rentals, cars or even jobs. Yet our government has granted debtors mercy—more mercy than debtor’s prisons or slavery—when they believe they can never repay debts, File for Bankruptcy in Federal Courts and be ready to list assets and debts at length and to endure lengthy, costly and humiliating procedures. You must have filed four years tax returns and be prepared to come clean by filing timely into the future.
Generally, the IRS audits and takes collections from returns filed in the last 10 years. But I once prepared a 23-year-old return from someone who failed to file. Filing starts the clock ticking. Pending Installment Agreements, Offers in Compromise and Bankruptcy can delay IRS Collections and the clock. Filers who did not pay might be able to run the clock out or otherwise prove debts “collectible.”
Living under the table means living at risk of being caught and incapable of building wealth with real estate loans or well-reported securities. If you can’t pay on time, expect lean living going forward.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. This Mortgage Loan Originator (NMLS #2565162) serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
