Jun 17, 2009

IRS Debt...Avoiding the headaches

I currently manage a client base that typically owes the IRS in excess of $10,000 and one of the most common issues that I run into when trying to explain what options my clients have in resolving their tax debt is getting them to understand that they may have to adjust their lifestyle in order to obtain a successful resolution.

So what does "adjusting their lifestyle" mean? It means that when you owe the IRS, especially if you owe in excess of $25,000, you more than likely are going to have to give up some luxuries or some expenses that you have grown accustom to.

You see, the IRS is not a creditor and they are not a bank. Your debt with them is more serious and carries more consequences than any debt that you may owe, including credit cards and mortgage payments.

I often hear my clients complain that they cannot afford what the IRS is trying to make them pay per month, however what they often fail to understand is that the IRS is not going to allow you to have an extravagant lifestyle when you owe them money.

Now, that is not to say that most of my clients live an extravagant lifestyle, however the way the IRS views this, especially if you owe for multiple years and well in excess of $25,000, you would not have been able to afford the lifestyle that you are/were living had you actually paid the taxes you owed.

This is especially a problem for my clients who were from the mortgage or financial services industries. They once made enormous salaries, and in the process, also incurred enormous expenses, such as large car payments, huge mortgage payments and increased their debt load on their credit cards. Well, now their income is drastically less, however they still have the large expenses that they acquired during their booming years and to top if off, now the IRS is enforcing collection against them.

The problem is that the clients, are spending every nickel they have to pay the $900 a month car payment, the $4500 a month mortgage payment and their $750 a month credit card bills, but they are still not paying the IRS. They, then don't understand why the IRS wants them to pay $1200 a month, when from their perspective they are broke. In actuality, yes, they are broke, but from the IRS's perspective they can afford to make a payment. Why, because they are living above their means and the IRS isn't going to allow them to live in excess of their means when there is a balance owed to them.

First, the IRS isn't going to allow the credit card payment at all. That means the client can pay at least $750 per month to the IRS. Next the IRS isn't going to allow the entire car payment nor the entire mortgage payment either. The IRS will allow up to $489 for a car payment and the housing and utility standards for the clients area will determine the monthly total that they will allow. Any amount in excess of the allowable living standards, the IRS will construe as disposable income and will want it as part of an installment agreement.

In short, do yourself a favor... if you owe the IRS, take a good look at your expenses that you are paying on a monthly basis and ask yourself...."if someone owed me money, would I allow them to pay this expense before they paid me?"

1 responses:

Kevin B December 3, 2009 at 11:43 PM  

So true about people spending way more than they can afford. This credit card mentality the consumer has been running through these last 20 years or so is catching up with us. Uncle Sam will get his share one way or the other so people have got to learn to budget.

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