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IRS Payment Plan

I owe the IRS money. What do I do?

My husband of 3 months died last year - after a 2 year battle with depression he took his own life. No life insurance - which we were looking into as newlyweds at the time but it would not have helped me anyway in this situation. I am nearing closing his estate & am in a panic. I was advised by a tax accountant to file married jointly. I contacted the IRS today to check on the status of the return & was told that the $1800 I owe (he was not working so I changed my filing for less deductions last year thinking we could figure it out come tax time) would be deducted from his return of $1500 even though I am paying $100 monthly on a payment plan with them. I need his return to be able to pay off his estate (lawyers, funeral expenses etc.) I already sold his car & his condo to make some money back for the estate. I am adjusting to 1 income for the 1st time in 7 years & am making $20k less per year at my new job so just cannot afford to make up the $1500 his estate is supposed to be getting from the IRS. Can I take money out of my IRA rollover from a previous job claiming hardship to cover this money? I have never been in this kind of a financial bind before (I never even had credit card until I was 30 & met him) & it is just adding to my grief please advise. I appreciate your help.

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Bill's Answer
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Highlights

  • Understand that adding to a tax debt breaks any payment plan set up.
  • Review the tax implications of withdrawing from a retirement account.
  • Consider an Offer in Compromise, if you cannot afford to repay the debt.

Speak with the issuer of your IRA. I do not think that it will be viewed as a hardship for you to take money out in order to pay your IRS debt, but check and find out. In general, a hardship is restricted to payments for medical necessities, down payment on a first-time home purchase, and expenditures for you or a child for higher education. If you take out money from your IRA and it is not defined as a hardship, you will be subject to a 10% penalty and will have to pay income tax on the withdrawal, too.

Your likely best solution is to contact the IRS and have the money you will owe this year added to the payment plan that you are already making. You mentioned that you are currently paying $100 per month. You did not say how much you owe. The IRS usually would allow a $100 monthly payment for a tax debt no greater than $6,000, so I am guessing that your old debt is not more than that. If that is the case, then the new payment they will offer you will not likely be more than $130 per month.

If you have a tax debt that is larger than I assumed and the IRS set you up on a low dollar payment plan because they felt that you could not afford more than the $100 per month payment, then you should speak to a tax professional to review all of your options. If you have a tax debt that the IRS feels you cannot repay, based on an examination of your household income and assets, then the debt can be reduced through an Offer in Compromise.

Whenever a person is in a payment plan with the IRS and adds to the tax debt in another year's filing, the current plan is made null and void. The taxpayer, in this case, can be subject to threats of levy.

If your tax debt is over $10,000 or if you are threatened with a wage garnishment or bank levy, I recommend that you speak with the tax professionals at Freedom Tax Relief.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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2 Comments

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  • TS
    Feb, 2012
    t
    Delaware, OH
    Hi Bill. Here is a little history: I took out a loan from my 401K a few years ago when I was going through a divorce(didn't know I had option to rollover to ex). I lost my job last year, and still owed on the loan. I had 90 days to pay it off in full, but of course had no way of doing so. I am currently on unemployment & attending school full time. The remainder of the loan balance was calculated as earned income for 2011. So now I owe both Federal & State taxes. I still have 33K in my 401K. My thought is to cash out my 401k, pay my taxes, and pay off my car - because money is too tight with a car payment & only living on unemployment. I know I will have to pay the 10% penalty (I'm too young to qualify for the age exceptions) but I wonder if there is a way to pay my taxes with out being penalized. i don't want the same thing to happen again next year- where I owe taxes & can't afford to pay them. Also, I am scheduled to have surgery Thursday and am already anticipating large medical bills in the near future...this is another reason I am considering taking out my 401k. I know this sounds like a sob story, and it is depressing, but I am managing...I just wonder what options I have to help me out ANY way possible. My main question is if I use my 401k money to pay my taxes am I going to be penalized teh other 10%. And second question is, how much should I set aside for next tax season to cover the withdrawal (additional earned income) I will be getting this year....like what %? thanks in advance for all your help!!
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    • BA
      Feb, 2012
      Bill
      If you use your 401k to pay your back taxes, the money you take out will both be taxable and subject to penalties. Unless the IRS seizes the money, which is very rare, you pay the penalty.

      Even money taken out under a legitimate hardship is subject to penalty. In this case, what the hardship allows is access to the money that otherwise could be off-limits to withdrawal. Penalty free withdrawals are limited to the following, according to Section 72(t) of the Internal Revenue Code:
      • You become totally disabled.
      • You are in debt for medical expenses that exceed 7.5% of your adjusted gross income.
      • You are required by court order to give the money to your divorced spouse, a child, or a dependent.
      • You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
      • You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59½, whichever is longer).

      Keep in mind any debt you owe the IRS can be put on hold, if you can show a financial hardship that makes you unable to pay, or put into a payment plan. While you are not working, you may want to speak to the IRS about "Currently Not Collectible (CNC) status. You can run the numbers on the interest the IRS charges while in CNC or a payment plan and compare that to the taxes and penalties you would pay for taking out more from your 401k.

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