What to do if you owe more to the IRS than you can pay...

Image via WikipediaCrying helps. Well, a little. Well, okay. Maybe not. But it just seems to go with the territory.

Let's just say that I've shed a few tears over our IRS debt. Sometimes the frustration from the endless phone calls is enough to bring it on. But crying doesn't really help. What does? Determination and patience.

It's tax season. April 15th is right around the corner and I figured this topic would be helpful to some people out there. Perhaps a couple. Maybe even a few. We'll see.

So what do you do if you owe more to the IRS than you can pay?

Well, I'll tell you what we did. What we're doing.

I'm going to structure this as a question/answer post. We'll start that way at least. See how it works. But first I need to say that I am not a tax attorney. I'm not an attorney of any kind. Not an expert. Just someone who's been there.

Okay... here we go....


Why do you guys owe so much to the IRS?
I'll start by reminding people that we were putting all of our money into the renovation of our house. We got behind on our income taxes and were planning on making that up in 2008.

But then Bob lost his job and all of our money then went towards paying our mortgage so that we wouldn't lose the house. But then we ended up in foreclosure anyway. And lost the house... but not in foreclosure. In a short sale.

Every time I talk to an IRS agent (almost every time) they ask, "Why do you owe so much?" This always puts me on the defense. I always hear that question as, "Why are you such a screw up?" And instead of responding, "Why are YOU such a screw up?!" which is what the child in me wants to say, I take a breath.

Why do we owe so much? Because my husband used to make good money as an independent contractor. But then he lost his job and because we had our savings tied up in the house (another way of saying we had no savings) our money went towards saving our house.

Simple answer: We got behind. But now we're trying to catch up as best we can and be responsible for our debt.


Wait, didn't you guys declare bankruptcy?
Why do you still owe the IRS?
Yes. We declared bankruptcy. The reason we still owe the IRS is because declaring Chapter 7 does not wipe out IRS debts. Or student loans, by the way.

While we were "in bankruptcy" we weren't required to pay our IRS debt, but we were allowed to make voluntary payments. We did not do this. Only because we couldn't afford to. The benefit in making voluntary payments is that you're chipping away at your debt and the interest.

Once we were "out of bankruptcy" we started receiving those certified letters from the IRS.


What are the options for someone who owes more to the IRS than they can afford to pay?
Well, there might be more options than we considered. One option is to hire a tax attorney and work with them. We wanted to handle it ourselves so we didn't go that route. Instead, I spent a lot of time on the phone with the IRS (did you know that their hold music NEVER changes? Never) to find out what our options were.

We were told we had two options and they were:

1. Offer In Compromise
Essentially an Offer In Compromise is the way to settle your debt with the IRS. If you want to settle for less than you owe. There's this big long form you have to fill out that's pretty confusing and you have to pay something like $100 for the process of consideration. You submit all of this material and the IRS then considers your situation. During this process of consideration, they stop sending you scary certified letters and they stop penalizing. So you have a breather until they let you know whether or not your offer is approved.

That's my paraphrasing. But you should really visit the actual IRS website that explains the Offer In Compromise.

2. Installment Agreement
This is where you agree to pay the entire amount that you owe, but you pay it in a manageable monthly installment.


Which option did you choose?
We chose the installment agreement. Here's why.

On one of my many long phone calls with the IRS, someone told me that it would be a waste of our time to submit the Offer In Compromise. This person said that because we were young and had at one point made a good amount of money, they wouldn't approve our offer.

Why? I asked. Why? Well, because we have the rest of our lives to work. We're not incapacitated. We statistically have many years left. Enough left to work and make up the money that we owe. So there would be no reason for the IRS to settle for a lessor amount.

This IRS agent told me that the Offer In Compromise is usually for the elderly or people who can no longer work or make money.

So we decided not to bother with that long and confusing form and instead pursued an Installment Agreement.

BUT. Yes, there's a but. Don't believe that agent like I did. I have a friend who used to work for a company that helped people settle their debts to the IRS. He told me that agent was wrong. The Offer In Compromise is not only for the elderly or people who can no longer work. He said that we should have at least tried it first. Well... too late for us.

This leads me to an important tangent:

When you talk to the IRS, always get the agent's ID#. Always. Always. Always. Why? Because in my experience, they give contradictory and often wildly inaccurate information.

Example, please?
Why yes, of course.

This example is from when I was in the middle of setting up our Installment Agreement.

-CUE FLASHBACK-

We're in a 1910 farmhouse on a rural island in the Pacific Northwest. It's raining. I'm very pregnant. Only one month away from my due date and I just got off the phone with an IRS agent who told me to fax in all of our financials in order to be considered for an Installment Agreement.

We had to gather bank statements from every bank account (at the time we had 3) for the previous three months and pay stubs from the previous three months.

When I suggested that it would be a lot of pages, the agent promised me that didn't matter. She assured me that they would accept a fax of any length. She told me to call back when I had it ready and an agent would sit with me on the phone while I faxed it in so I could be sure it arrived. This agent, I might add, was very kind on the phone. So friendly.

Well.

I gathered all of our financials which totaled 45 pages (!) and made that call.

So there I am really pregnant at EarthBox (my place of employment) on my day off because I don't have a fax machine at home and my wonderful boss said I could use the one at work. I have all 45 pages of our financials ready to get this darn thing set up once and for all.

The phone rings. I follow the prompts as usual. The familiar hold music clicks on. Hold music I'm sure is the same in the elevator to Hell. Anyway, there it is. And here I am.

Agent #0247233 answers.

Her voice doesn't sound too friendly. But I don't let it affect my tone. I explain why I'm calling. In a very kind. Very friendly tone. My tone does not work on this agent.

And this is where I go to my notes (always take notes):

my notes from my call with the IRS on June 4, 2010:

-Spoke with #0247233. She was incredibly rude to me. When I asked to speak to a manager, she put me on hold for a long time. Then came back and said that all of the managers were in a meeting.

-She told me they would NOT accept a 45-page fax (which conflicts with the info I was given on June 2 when I spoke to #0090582). I told her that I was told it would be okay to fax it in.

-Said they wouldn't accept a fax greater than 10 pages. I had to mail it in.

-She refused to answer my question about how to mail it in. I wanted to know if it would be better to send it Priority Mail or Certified. She wouldn't answer. She said, "I'm not going to answer your question because you'll just say I gave you the wrong information."

-When I asked what I needed to include with my pay stubs, she got very argumentative. Again saying she wasn't going to answer my question because she didn't want to give me a reason to say she gave me "wrong information."

-I said, "I'm being really nice to you and you are being hostile towards me." And she hung up. She actually hung up.

At that point, this very pregnant woman got in her car and sobbed. Just sobbed.

-END FLASHBACK-

So, yes. It can be extremely stressful trying to set something up with the IRS. So many hoops to jump through and just wanting to be free of the debt.

It makes it even harder when the person on the other end of the line is hostile for no apparent reason and when you're given blatantly inaccurate information. It's beyond frustrating.

But it happens. So what do you do? Well, if you need to take a minute or two to sob it out. Do that. Then just get back on that horse. You have no choice. The IRS will not forget about your debt. You have to find a way to be responsible for that.

Therefore, you just have to stay on top of things. If you're given a call back date, make sure you call back ON THAT DATE. Don't miss anything. And when in doubt, call and ask. Double, triple check everything.


How do you set up an installment agreement?
You call the IRS and tell them that you'd like to set up an installment agreement. You will then have to fill out form 433-F. You can fill it out and then call to give the information over the phone. Or you can fill it out and mail it in with the back-up documentation.

The required documentation includes (but is not limited to):

3 months bank statements (all accounts)
3 months pay stubs

Basically you're sending in proof of your monthly expenses. The IRS uses this information to determine how much you're ABLE to pay on a monthly basis. They will always take the HIGHEST possible amount based on your income vs. expenses.

IMPORTANT NOTE ABOUT INSTALLMENT AGREEMENTS:
I'm not sure if this applies to ALL Installment Agreements... but it did apply with us. Once you enter into an Installment Agreement with the IRS, a tax lien will be placed on you and show on your credit score.


Are you now in an Installment Agreement?
Yes. We pay $200 per month. We were originally paying $750 per month but that was when we weren't paying rent. Since we now pay rent and have more expenses living in Chicago (including baby expenses) the IRS agreed to lower our monthly amount.


Do you owe more to the IRS than you can pay? If so, how are you going about paying your debt? What questions do you have? Other suggestions? Please share in the comments section.

Thanks! I hope this helps.