When you Owe the IRS

EP 67 - When you owe the IRS

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Folks. Have you ever found yourself dreading that time of year when you file your taxes? Or maybe you've gone to the mailbox and experienced that sinking feeling. When you open a letter from the IRS with balance due.

Hey Ralph, I just got home from work and I received a notice from the IRS that I owe them over 4, 000. I am in shock and I don't know what to do. It says that they have changed my return from last year and that I made some sort of error. I am not a tax expert and I have no idea what they are talking about.

I need help and I am scared because I have heard that the IRS will not stop until they get paid. Would you please tell me what I can do to get this fixed? I really appreciate it, and I will look forward to your response. My name is Betty, and I am here in Dallas, Texas. God bless you, Ralph, and I hope you can help me.

Well, let me tell you this. You're not alone. Millions taxpayers every year, face the reality of owing money to the IRS. And it can be a really stressful situation. [00:01:00] But with a little knowledge, and some thoughtful planning, we can sort through things together. So let's do that today.

Welcome to the ask. Ralph podcast on another tax talk Thursday, where I'm here to help you navigate the sometimes murky waters of personal finance. Remember this as Christians, we have a responsibility to be good stewards of what God has entrusted to us. That includes handling our finances wisely, which also means understanding our tax obligations.

 Let's dive right in and address the elephant in the room. Why do people end up [00:02:00] owing the IRS money? Here's some common reasons.

I find these everyday in my tax practice. The first one is underpaying estimated taxes. Well, how can this happen, Ralph? if you're self-employed. If you're a freelancer, those would significant side income often have to pay estimated taxes. Well, Ralph, you might ask what are estimated taxes. Those are taxes that you pay throughout the year. As an estimate to what you're going to owe at the end of the year.

 when you work for somebody. Every time you get a paycheck, they take money from your paycheck for taxes. Well, if you work for yourself, There's nobody taking that money. So the IRS wants you to pay taxes on an estimated routine because they want you to pay as you go. So if you didn't pay enough, You can end up with a balance due when you file your return.

So that could be the first reason why you might owe the IRS. Another one is the income changes. Hey. Perhaps you've got a big raise that's wonderful, or a big bonus Or started a new, higher paying job midway through the year. That's a great thing. But it also means more income into potentially a [00:03:00] bigger tax bill. If you didn't change your withholding to reflect those changes. I see that frequently.

Here's another one that could land you in. IRS hot water and that's errors or miscalculations. Truth is even with the best tax software mistakes can happen. Trust me even, I make mistakes and I'm a professional at this.

 A simple miscalculation. Over looking at deduction or claiming a credit you're aren't eligible for can result in an unexpected tax bill. That's when you get that bill in the mail and it says, Hey, Ralph, by the way, We looked at your return and we've made some adjustments. How about major life events? maybe you sold some assets like stocks, real estate, or the newest one cryptocurrency, you need to report those cryptocurrency transactions.

I have to ask every client that comes in. Did you have any cryptocurrency sales? Maybe you took money out of a retirement account early. All of these things can generate taxable income. And sometimes people just aren't prepared for the impact of those events.

Another big one is under withholding. Unfortunately, I see this [00:04:00] frequently as well. You need to make sure that throughout the year, you're checking your pay stub. You know, that's one of the things I say to clients all the time. They come in to me at tax time and I tell them they owe money and they say, Ralph, how could this be?

My employer made a mistake. I said, well, the truth is. You get a pay stub every time you're paid. You need to look at our pay stub and see if it makes sense. If all of a sudden you're getting more money in your take-home pay, you have to ask yourself, why did I get a raise? Okay. That makes sense. But if you didn't get a raise, maybe somebody made a mistake on the payroll side, and now you're going to end up owing money at the end of your, if you don't fix it.

So you got to look at your pay stub as you go. So I always try to give you action steps. So the first thing you need to do when you realize you owe money is to figure out exactly the reason why. Take a look at your documents, take a look at your previous tax return and compare that to your current financial situation.

And most of the time. You'll notice what's changed.

So now we've arrived at the point where you've got that dreaded IRS notice or the tax person has told [00:05:00] you, Hey, you owe money.

So let's talk about IRS notices. if you do owe the IRS, they're not going to be shy about letting you know, they will let you know that you owe them. They're not always great about telling you if they owe you, but they're great about telling you if you owe them. So here's some of the most standard notices you could receive. The first one is what's called a CP. 14 notice it is a balance due notice. This is a straightforward notification that you have a balance to pay, and it explains how to do so, you know, It's going to be basically, it's going to have your name, address. And say for which tax you were talking about, it's going to say Ralph, we've reviewed your return.

You owe us $2,512. And the reason you owe us is because we made some adjustments, period. It's pretty straightforward.

The next one is what's called a CP501 notice. So once you get that CP14. notices is, Hey Ralph, you got a balance due. Then they're going to remind you. They're going to hound you. You know that CP 5 0 1.

Notice a reminder that you have a balance due. It's simply a follow-up that you miss the CP 14 [00:06:00] notice, they're not going to let you just forget about this.

The next notice you could receive is what's called a CP503 notice. That's the second reminder. This is their way of telling you.

Knock, knock things are getting a little more serious. This is the time to be proactive and take action if you haven't already done. So, you know, one of the things that I probably should have mentioned at the beginning here is as soon as you get that IRS notice you need to address it. Don't just put it in the drawer and pretend like it's going to go away.

It's not going to go away. If you work with somebody like myself, get in contact with me. and as a matter of fact, it's a great time to tell you if you need. IRS assistance. if you've got one of these issues, you can go to our website. That's askralphpodcast.com/store. And you could schedule an appointment with me.

So I can review that notice with you.

Now. The final notice that you get, and this one is time to pay attention folks. This is the CP504 notice. And it's called intent to levy. This means you've ignored the IRS. You haven't paid attention to their other notices. You've put it in the top drawer and forgotten about it. [00:07:00] This is basically telling you, listen folks, the IRS is going to seize your assets.

What does that mean? They're going to take your property. They're going to garnish your wages they are going to send a letter to your employer and say, Hey, from now on when you pay Ralph, pay us first. Or they're going to send a letter to your bank and say, Hey, what's in Ralph's bank account. We're going to take that. If you don't respond. And resolve the situation.

This is what you're going to get to.

So action.

Step number two. And I can't stress this enough. Don't panic. When you see an IRS notice. But at the same time, you can't ignore it. Read it carefully. It will generally contain critical information about the amount owed the due date and your options. Then it's time to take action.

Like I said, reach out to somebody. Call the IRS. You might be on hold for a while, but don't put it off. So let's say you've gotten to the point where you realize there's an error on your return, or you owe money to the IRS either way. Same thing. What'd you say, Ralph, look, I can't afford to pay this all at [00:08:00] once. Hey, you're not alone.

I've been there. This is what I do for a living. And I've been there. Many people experience unexpected financial setbacks, and that's okay. It happens. Life's about setbacks. It's how we work with those and move forward. So here's the good news. Even if you can't pay your entire tax bounce immediately. Now, I'm not going to tell you that that's not the best option because truth be told that is the best option.

But if you can't. Here's some IRS options for you. The first one's an installment agreement. This one's pretty straightforward. You can negotiate with the IRS to make a monthly payment that fits within your budget. And there's basically several kinds of these. There's a short term payment plan. Now these are generally for balances under $50,000.

If you can pay the debt within 180 days, you know, they're going to. You could basically go online actually. And go to irs.gov. And if you don't have an account set one up and say, look, I see, I owe $2,000. So Mr. And Mrs. IRS, here's what I can do. I can pay this over the next. 180 days. And for the most part, they're going to accept that. [00:09:00] Now let's say you can't afford to pay it over 180 days and you go into what's called a long-term payment plan or what they call an installment agreement. This is used for balances that you know, are going to take more than 180 days to pay. Now, in this case, the IRS going to ask you to fill out some forms.

I'm not going to get into those now, but they're basically a 4 33, a or 4 33 B form. And again, if you need help with this type of thing,

You can reach out to somebody like myself. Or somebody who did your taxes and ask for this. Payment plan. Now. There's also this thing called a streamline installment agreement. So, if you owe less than 50,000, you likely qualify to arrange this online or over the phone, simplifying the process. Like I said, you can go to irs.gov. They have a link there, which is an online. Installment agreement. And basically you fill in the blanks and say to them, listen, IRS. I can't afford to pay you all at once, but here's what I could do. And generally speaking, they're going to want you to pay that back over 60 months.

Now here's the thing you need to understand. [00:10:00] It's not magic. The IRS is going to charge you penalties for as long as you owe the tax debt. And they're going to charge you interest for as long as you owe the tax debt. So if you have other ways of paying it, I would highly recommend you do those, but if you've got no other choices, Then use the IRS installment plan. It'll keep you out of hot water or keep you from getting your wages attached or your accounts levied. Now, if you find that there's absolutely no way you can pay, even on an installment plan, there's a thing called an offer in compromise. So Ralph, what is an offer and compromise?

What if you qualify the IRS may allow you to settle your tax debt for less than a full amount owed. Now, if you've watched any television, you've seen these, you know, I'll settle your tax debt for such and such. You know, pennies on the dollar, you can be real careful of those. My experience has been, these are usually reserved for severe financial hardship cases. So to be considered, you typically need to prove that paying the full amount would create an economic hardship or that there's doubt about the amount you actually owe based [00:11:00] on your tax returns.

Now. in practice. This is what this looks like. I've had to several times in my career. I've had a client come in where they owe money and now they're disabled. Or they're unable to work. In those cases. There is a good possibility of getting the IRS to accept one of these. Offers in compromise. But the truth is if you have assets, you know, if you've got equity in your house, If you've got the ability to work, if you're making money. They're generally not going to approve those because the bottom line is they're going to look at it and say, you know, if you can afford to pay us. My take you awhile. We may add penalties and interest as you go, but you can't afford to pay us. So, if you're going to get into one of those offers in compromise, again, I'm going to recommend you speak to someone who is skilled in that area.

You don't want to do this alone. This is not a simple thing to, to handle. It's something you want to work with a professional. Now if none of those things fall into place, there's this thing called currently not collectible status. This is not necessarily a great thing, but you can [00:12:00] actually call the IRS and they'll set up a flag on their system.

It says it currently, there's no way for you to pay.

The good news about that is it does pause collection activities. So let's say for example, that you have an IRS notice and you owe them for your taxes for last year. And you got hurt at work. So you're on short-term disability and you just can't afford to pay them. Well, you could call into the IRS or go online and set up, one of these. currently not collectible status.

And the IRS is basically going to flag your account for 12 months and say, you know, Ralph was hurt at work. He's not working right now. He expects to get back to work in 12 months. So we're going to put it on currently, not collectible. That doesn't mean it goes away. Folks. It just means that the IRS is not going to try to collect it from you. At this moment now, usually within 12 months, they're going to send you a letter and says, Hey, by the way, Ralph, you still owe us. And, we're still going to charge you penalty and interest, which that doesn't stop folks.

As soon as you owe money. as of the tax filing deadline, if you don't pay them, You're going to pay [00:13:00] penalty and you're going to pay interest. You can't get out of that. That's the bottom line. So the sooner you can pay the better.

So let's move on to action. Step number three. If you can't afford to pay what you owe, contact the IRS as soon as possible, don't wait for more notices. They do have agents that can help you work to find a solution.

Now you might not be happy with all those things. But there are things that you can do. So here's some additional tips when dealing with the IRS. If you have a balance,

be organized, gather all of your tax documents and relevant financial records before contacting the IRS, have those things in front of you when you call in. You might be on hold for an hour or two.

I hate to say it that way, but that's the fact. But have all your stuff ready.

You also need to communicate proactively don't avoid the IRS, address the issues, head on ignoring your notices will only make the situation worse. you can't just put it under, the pile of mail that you got or stick it in the drawer and hope that it's going to go away.

It's not going to go away folks. They don't forget about it. They've got super computers that keep [00:14:00] an eye on these things. Again, I've mentioned this several times. Consider professional help. If your tax situation is complex, if you're feeling overwhelmed, seek guidance from a tax professional, somebody like myself, somebody that's local to you. If you want to use us, like I said again, you can go to askralphpodcast.com/store. And you can schedule consultation with me .

Now let's talk about the Christian aspect of this. 'cause that's part of what my goal is here in this podcast. As Christians is important to remember the principle of honesty, integrity in all matters, including our finances. owing, the IRS can be a source of stress and fear. I get it. But remember we serve a gracious God. If you remain proactive and seek solutions, you will overcome this financial challenge. Folks we've covered a lot of ground today regarding what you do.

If you find yourself owing the IRS, remember it happens. And there are solutions.

So here's a recap. What we talked about today. first of all, understand why you owe the IRS. Read the IRS notices carefully. Don't ignore them, act on [00:15:00] what they're telling you to do. And if you can't afford to pay all at once, explore installment agreements. Offers in compromise or other options IRS provides. There are ways to get past this. And while we're there, don't forget to visit our podcast page at askralphpodcast.com.

There's a ton of resources out there. There's all kinds of, I think we have almost 300 episodes now. You can go back there and look for a topic that's of interest to you. And, while you're there, if you want to click on the bottom right corner, there's a microphone icon. And tell us about your story.

I'd love to share your information on our show. that's how we help other people. So let's hear your thoughts on tackling those tax issues . Maybe you've come up with an idea that works best for you. Well folks, it's time for me to go for today, but may you always stay financially savvy and God bless you abundantly. [00:16:00]