If you owe back taxes...can you try and cut a deal with the IRS!?

Question

Or are you just stuck with the penalties and interest. I owe roughly $8000. yet the penalties and interest ar about $2000. I can take a loan out of my 401k...but I only can for $7000. Will they cut a deal with me?

Answer 1

Did you actually file your tax return and shows you owe, or did IRS send you a notice saying you didn't file and and now you owe.  IF you didn't file you can still file.  And more than likely you wouldn't owe $8K; Just remember if you take a loan from your 401K then you will more than likely owe again next year.

Download form 9465 Installment Agreement Request and make you payment proposal as much as you can afford monthly for 8K if you pay the minimum payment accepted which would be $135.00 you will never see your balance go down because interest and penalties continue to accrue while you are in an installment agreement.

You can write and request abatement of penalties but you must have a good reason why you ended up owing and why you can't full pay, and why you think penalties should be abated.

Good luck.

Visit IRS website www.irs.gov for more information on installment agreements.  Keyword: installment agreement.

Answer 2

The IRS will not "deal" on amounts less than $10,000.

If you owe under $10k, your best bet is to enter in to an installment agreement and stick to it.

Answer 3

For penalty, if you had a "good" reason for not filing or paying, like bad advice from accountant/CPA/tax preparer/IRS personnel, or severe medical problems or family problems that would have interfered with filing/paying, they would consider waiving the penalties. You need to make a written explanation, and sign it. If you excuse is I didn't have the money or didn't feel like it, forget penalty abatement.

The IRS will try to determine what is the best way for you to pay back your taxes. Lump sum payment; installment agreement; offer in compromise, currently not collectible. Pub 594 has all the gruesome details.

If you cash in your 401(k), if you are not 59 1/2 or older, you may be hit with an early withdrawal penalty, which is worth trying to avoid. That may happen if your are fired or quit before the loan is paid off. A loan is OK, but you will be paying back with after-tax dollars, negating the tax benefit of the 401(k).

You can offer an installment agreement, a monthly payment until the tax is paid off. They probably would accept that. $105 to apply. Is about 400-500 per month OK with you? YOu get to keep your 401(k) in that case.

An offer, from what you said, would probably not be accepted, because you have your 401K, and presumably a job. In about 10 years time with forced collection (lien, levy your bank, etc.) they could get the whole $8000. And it cost $150 to apply , and they keep the money.

Forget interest. You have to show it was the IRS fault you didn't pay interest, with the IRS as judge and jury.

Answer 4

The first thing i always ask my customers is; Is the tax assessed correct?  If not then when the correct assessment is made then penalty and interest is recomputed to the correct amount.  Then I need to know what the penalties are; your biggest one is probably failure to file on time, if you have a good reason such as a family member died and i couldn't file due to grief then you can probably get abatement.

The next thing is you must understand what made you owe in the first place; is this likely to occur again.  If so you need to increase withholding or estimated taxes.

IRS is unlikely to cut a deal with you because you probably have the ability to pay in full over time.  I would tell you that filing an offer in compromise is a waste of time and money.

I would not recommend you borrow against a 401k because if you leave your job while you still owe on the loan you would owe the penalty and still have to claim the unpaid balance as income.

The only way to get this problem to go away is to throw money at it.  You should pay as much as you can, as soon as you can, as often as you can to keep the total owed as low as possible.  IRS will probably accept payments of $134 a month, any future refunds would be applied to the balance and you will have to pay a fee for starting the installment agreement.

Answer 5

If you didn't have any penalties assessed for the three years prior to the year you owe for, you will qualify for removal of the failure to file penalty (and failure to file penalty if you filed late).  Does the $8000 include the penalties and interest. If so, I'd borrow the $7000 and pay that towards the debt, then wait a couple of weeks and call to ask for a penalty abatement. If granted, you would probably end up getting money back. If the $8000 doesn't include penalties and interest I'd pay the $7000 and setup a payment agreement for the balance, Once the entire amount of tax has been paid, you can then ask for abatement of penalties.

If you did have penalties assessed during any of the three prior years, you would have to have "reasonable cause" to get penalty relief--and there aren't that many good reasons.