I just read that Christie Brinkley owes over $500,000 in back taxes. That’s an ugly place to be. Sadly, I’ve been there before (not $500,000, but still a sizeable chunk of money). I’d like to share that story here.
When I began advising people about money, my background was similar to the many professional athletes who become financial advisors: I had no training. I was exactly “that guy” the pros and financial books warn you about when they say “don’t hire the new advisor.” Sure, I’d passed a few tests and took classes sponsored by the company I was going to work for, but I’d been an English major in college with an emphasis in creative writing. Talk about “not in Kansas anymore.” I wasn’t even on the same planet.
Why I’m An Expert In This Area
So, there I was, learning quickly. My paranoia about my lack of knowledge and the ability to “dumb down” difficult financial concepts helped me with early success in my new field—probably because I was coming at those concepts from a similar non-finance point of view. I hauled in a nice income. I had a great relationship with my clients. If I didn’t know something (which was often), I said “I don’t know, but I’ll find out.” That happened a ton.
Here’s the bad part of the story. I was a 1099 independent contractor. (For those of you unfamiliar with “1099”, it means that I didn’t actually work for the company. Because I was technically independent, zero taxes were taken out of my compensation. Without an knowledge of the full impact of not paying taxes, this was a financial meltdown ready to burst.)
Near the end of my first awesome year a friend said, “Who is your accountant?”
Me (thinking): “Dude, I should get one of those!”
So, I did. I found a guy named Tom. He was a great number-cruncher, but a horrible financial coach.
Tax guy Tom: “You owe $26,000.”
Tax Guy Tom (clueless): “Do you want to attach a check to the return?”
Me: “WTFFF????” I’m pretty sure I yelled. Yeah, I screamed. I should have been screaming at myself. It didn’t matter. He couldn’t believe I was dumb enough to spend every penny of the money I’d made. The funny part now is that I had used all that money to pay down debt.
I’d committed every stupid mistake in the book.
So, what did I do? I made the brilliant decision not to file my taxes, thinking that I’d find a way to catch up.
Note to the world: It doesn’t work that way. You can’t catch up.
So, Christie, I understand an overdue tax bill. I know that today you say that it’ll all be paid quickly. That’s good. If you can’t, or if any other reader is in a similar situation, here’s what to do. This is what I should have done:
Joe’s Awesome 7 Step “Get Your Overdue Tax Bill Paid” Plan (or “Here’s What I Did”)
1) Find good tax advisors. My advisor helped me file back taxes and face the music. By avoiding the overdue tax bill, it was becoming bigger and more difficult to pay. I thought I was finding a “good” advisor when I met Tom. ….but, had I known how to ask questions, it would have gone smoother. AND I should have known to interview more than one person. I found a guy with lots of pretty letters after his name and hired the first one. I needed someone who could walk a beginner through the process of receipts and “what’s deductible and what ain’t.”
2) Communicate with the IRS. You need to face the music sooner or later. What surprised me is how easy the IRS people were to talk with. I was ashamed of my overdue tax bill, but they deal with people that have late taxes all day, every day.
Here’s a tip: the IRS phone line gets busy, so if you’re going to call, do it right after they open. You should get right through (I now call whenever I have questions or am feeling lonely). In my case, they knew promptly what programs to point me toward. Why did I call the IRS? My tax advisor told me to call them. She said it would help me stay on top of the situation. She also talked to them from time to time. (I had to sign a paper giving her the limited power to discuss my personal tax situation with the IRS first.)
3) Decide which method works best. There are two general directions you can decide between if you can’t pay the entire overdue tax at once. First, you can opt for an offer-in-compromise. This is a settlement with the IRS to pay less than your bill. I couldn’t go this route because (as my tax advisor explained), I had a high income stream and there was a good probability—in the IRS’ eyes—that they’d be able to collect the whole amount sooner or later (it was going to take me 30 years, but they don’t care. They may be nice, but those IRS zombies live forever, apparently.—I HAD to have one IRS joke in this piece….). If you owe less than $25,000, you can apply for an installment agreement, and will usually be accepted as long as you haven’t been a repeat offender. For amounts more than $25,000, the IRS is a little more like a nervous loanshark. You’ll have to fill out some extra paperwork.
4) Fill out the appropriate paperwork. Here’s a link to the IRS page describing all the appropriate tools. Before anything, you need to file the appropriate tax forms, if you haven’t already. Once that’s done, if you owe more than $25,000 on your overdue tax bill (like I did), you’ll need to fill out Form 433F, the Collection Information Statement. If you’re pursuing an installment agreement, complete Form 9465, Request for Installment Agreement. For an Offer in compromise, read IRS Booklet 646. It explains thoroughly the process of applying to reduce the amount you owe the government.
5) Be prepared to pay a fee to set up the agreement. As of this writing, direct debit and online payment plans cost $52, while payroll deduction plans run $105.
6) Wait for an answer from the IRS. They’ll respond in writing. If you called the IRS as I recommend above, you may receive an answer while you’re on the phone with the agent.
7) Realize that speed is your friend. Confronting the pain today is better than waiting. If you’ve managed to accumulate $500k in debt, you’ll owe interest and may owe penalties if you didn’t communicate effectively with the IRS.
Have a tax issue you’d like to discuss? While AverageJoe and TheOtherGuy aren’t tax advisors, we can point you toward resources and strategies. Use the comment section below or email me at joe (at) thefreefinancialadvisor (dot) com.