In October 2017, not even 2 full months after we signed our second installment agreement with the IRS, we filed our taxes, and we owed more than we had paid in. It’s beginning to feel like we will always owe back taxes to the IRS. We were able to pay all but $1,200 of it, but it was still grounds to nullify our installment agreement. We tried to call the agent we had been working with, to see if we could head the problem off at the pass, but his office phone now belonged to someone else. His cell phone was no longer in service.
We continued making our agreed upon payments, as well as making monthly payments towards the estimated taxes for the next year (which were also going to be more than we had been anticipating), but we did not have enough room in our budget to squeeze out the additional $1,200 until I got my Christmas bonus that year, which was a substantial $10,000 (before taxes, of course). We paid off the remainder of what we owed for that year and what we estimated we would owe for the following year (and stashed $5,000 in cash at our house, just in case IRS decided to ever seize all the money in our bank accounts again). But the damage was done. We received a notice in the January that our installment agreement was void.
When you owe back taxes you live under a microscope.
I called the main IRS number, and after waiting on hold for over 90 minutes (which is pretty typical), a woman told me that we only had agents assigned to us when we were non-compliant. I said, so do I just wait for another agent to be assigned to us and show up at our door? She said, no, you work directly with us. You fill out these forms (the same ones we had filled out 6 months earlier), and send them in, and then we‘ll send you a letter telling you what your expected payment is.
After filling our taxes in October, I thought our payment might go up a little, but I wasn’t too worried about it as Scott was making a little more money (hence the additional taxes owed). I redid all the paperwork again, and there was still only $800 left over, but now there were over $1300 of expenses they didn’t have to allow (we had over $5,000 of medical debt we were paying off thanks to 2 ER visits and a stress test to tell me I was under a lot of stress – big fucking surprise – but there was nothing physically wrong with me). Now I was worried.
Dealing with the IRS is painful and frustrating!
When we got the letter with the payment amount, it wasn’t the worst case scenario, but still far more money than we could afford. $1,700. I called them again, and the woman I spoke to that time may be one of the rudest people with I have ever had to deal with. I explained that I was calling in regards to the amount they had assessed we could pay for an installment agreement, and that we couldn’t afford it, and she snidely replied, “Don’t tell me you can’t afford it. We determine what you can afford.” I’m not an asshole by nature, and even when I’m irritated (which I was), I try not to be one (when a situation requires an asshole, Scott steps in). So, I was still being nice when I said, “It’s more than double what we agreed to less than a year ago, but we’re not making twice as much money.” She replied, “You can either agree to that payment, or you can pay off the entire amount now.” Now I was pissed. I said, “How do you expect us to do that?” And she said, “Take it out of your retirement accounts.” My heart sped up.
Side bar. On the form for the financial assessment, you have to disclose all of your assets. Do you own a home? How much is it worth? Cars? Coins? Collectibles? What are their values? That includes any retirement accounts. My 401k contribution had been set more than 2 years before we ever had any trouble with the IRS, and I never gave it second thought once we did owe back taxes to them. Until that conversation. After that, I read an article by a tax attorney that said IRS is usually reasonable to work with unless they feel you have been egregious about not paying them, and one of the examples he gave was continuing to contribute to your 401k while you owe back taxes. Fuck. Me. Back to the story.
Still pissed, but more subdued, I told her I couldn’t cash out my 401k and she told me I would have to pay the monthly payment they assessed I could pay then. I curtly told her I would have to discuss it my husband and would call them back.
After doing some digging, I determined that I could not cash out my current 401k (because I still worked there), but I was allowed to take a loan out of it, up to 50% of its value. However, the 401k I had from a previous employer (which I started when I was 20) was completely up for grabs. That combination would have paid off only $57,000 of the $83,000 we owed in back taxes and would have resulted in another $12,000 bill in taxes and penalties. Gutting nearly 20 years of retirement savings seemed like a terrible option to remain nearly $40,000 in debt.
We went through our budget again. There was very little excess for us to trim. The storage units would have to go (problematic for reasons I will explain in a future post). We would have to default on our medical debt, which would destroy our credit history all over again. There were a couple of other small things, Hulu & Netflix, cheaper groceries, cheaper dog food, lowering the thermostat to below 64 (we were already in sweatshirts and under blankets every night). But every ounce we could cut would still leave us a couple hundred dollars shy of the amount they had deemed we could afford to pay.
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You get good at begging and pleading for mercy.
We called them back, hoping to get the payment down, but resigning ourselves to the fact that they had all of the control, and that we might be fucked yet again. The woman I got the second time was infinitely nicer than the previous one. I explained the situation and she asked me to hold on while she reviewed our paperwork. She then told me there was a discrepancy between what I had entered as our monthly income on the form and the taxes we had filed, $10,000. I explained I had received a huge bonus, but could not count on that as part of my income, because I had no idea if would happen again. She agreed. She read off the mortgage payment amount, which I confirmed, and when I pointed out we also pay park rent, she said, that’s not on here. I told her it was on the paper work I filled out. She added that in and I started to explain about the medical debt I had racked up, and she said, that brings your payment down to $822. I stopped talking.
Our new installment agreement went into affect in May of 2018. We owed $82,334.29 for 2009, 2010 & 2012, which is tens of thousands of dollars more than we owed for back taxes initially. Everyone tells you to pay off the oldest debt first. But there is nothing in any of the paperwork we signed stating that we had to do so. And once we had learned about the extra 0.5-1% penalty on new taxes, we had started paying the newest first, to save ourselves as much money as we could. Even though the penalties and fees had lapsed by this time, I continued to do that once we had the installment agreement. Paying the $822 a month, we would not have been able to pay off the entire amount before the debt expired, no matter what we paid first, but it would get us out of debt a year earlier, and save us nearly $14,000 when the oldest debt expired in 2020*.
Or so I thought in 2018.
*I had mixed feelings about not paying off our debt completely. On one hand, it was money we owed, and we had never defaulted on any debt before. On the other, the amount that would expire before we could pay it was much less than the interest in fees that had been tacked on over the previous decade…