I owe the IRS a lot of money that I don’t have, how much trouble am I in?

by Marc Enzi

I had a caller this past week who asked this exact question. The person is a Realtor in Katy Texas, they had a very good 2018 selling homes in Houston, Katy, Harris & Fort Bend County; the Realtor is afraid to file their tax return because the IRS will then know the Realtor owes the IRS a little over $100,000 and doesn’t any of it left to pay he IRS.  

I explained that this is stressful but fixable.  Take a step back and breathe, this is not the end of the world, and the IRS is not going to lock you up.  That said, the IRS is not going to ignore you either and the sooner we deal with this, the less expensive the matter will ultimately be.

The good news is the person did file for an extension.  Always Always Always file for an extension if you do not think you will an accurate tax return together by the deadline.  The extension is not an audit flag, that is just a rumor.  Late returns have a higher chance of examination, and garbage tax returns with guesses and made up numbers are big red audit flags, so take your time and get it right.

Filing late is not just an audit flag, but the penalty is 5% per month, so in this case, the late file and late pay penalties of $5,000 plus interest $516.57 would be added every month the return is filed late.  Since the caller filed for an extension, the late file penalty did not apply but the late payment penalty does as does interest, so the total increase per month was about $995 per month as opposed to $5,517 per month for ignoring the issue altogether and not filing.

So we got the tax return filed by the 10/15 deadline, and the $100K tax bill has grown a bit because late payment penalty of ½% per month is now $3,000 and interest is another $3,054 for a total due of $106,054.

So now our Protagonist owes the IRS $106k that he doesn’t have and in less than 6 months, the 2019 tax return with a similar amount will also be due.  What does he do?  Try to pay the old debt and get behind in the 2019 debt? Or vice versa? 

We advised our client to not worry about the old debt just yet, rather focus on getting on the right track going forward.  We will have a better outcome if our client is current and in compliance with filing and deposit requirements than if he keeps racking up new debt each year.  If he keeps going repeating the same mistakes, the IRS will not be as willing to work out a settlement as if he has old debt but has established a record of doing things right since the debt was accrued.

Owing tax debt is not fun, but it is not criminal either.  Willfully failing to file and refusing to pay if you have the money and actively hide the money to keep from paying, that can be prosecuted.  The best thing to do is to make certain your tax return is correct and accurate and filed by the due date and make certain you have enough sent in via payroll withholding or quarterly deposits.  If you have questions, give Tax Solutions-Trusted Globally a call 281-578-1040, we can help.

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