I Owe the IRS a Lot of Money and They’ve Put a Lien on Me. What Do I Do Now? – George

“Dear Jim,

I own IRS appx 40,000., 65,000, with penalties and interest in back taxes. IRS recently notified me of a lien for almost 40,000. I want to set up an installment plan with the irs over 5 years to pay all the monies due. I am a retired federal employee and make approx 90,000., a year I am currently helping my two oldest grandsons through college and need reasonable payments.

Do you think IRS will be willing to agree to payments over 5 years or will they want to take most of my money quickly as possible? If not what are my options?


Dear George,

Thanks for the question.

Some background before we go to your next steps. You may be able to pay the amount over 5 years- you would want what the IRS refers to as a “conditional installment agreement.” I assume that your debt is less than 4 years old, so you will have time to pay the IRS before the 10-year collection statute expires. Normally, the IRS determines your ability to pay based on allowable living expense standards. What this means is that the IRS can put a limit on what you can pay for food, clothing, shelter, car expenses, and other household expenses. They would also allow you actual expenses for taxes paid, medical and term life insurances, and certain other expenses. However, they would not allow other expenses that they deem were not necessary- examples being college tuition, charitable deductions, 401k contributions, and support of people who are not your dependents. However, under a “conditional installment” agreement, the IRS will allow almost all of your expenses as long as you can pay the entire balance off in 5 years or less.

There are two complicating factors in this type of agreement:

  1. Determining your ability to pay based on actual expenses (this may show you actually can pay the amount in less than 5 years), and
  2. The IRS may want you to pay first with any liquid assets or equity that you can secure from property (this includes borrowing from retirement plans, equity in homes, or selling any stock or recreational property)
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I would also look into lowering your liability with any penalty relief. If you have a clean compliance history and this is first time you have had trouble with the IRS, you can request first time penalty abatement for any failure to file or failure to pay penalty. If you have reasonable cause for not paying (I do not know if you filed late and incurred a failure to file penalty), you should request penalty abatement from the IRS, in writing and attaching any supporting documentation to prove reasonable cause.

If you make $90,000, unless you have many dependents and/or live in a high-cost area, most likely your only payment option is an installment agreement.

Your next steps:

  1. Make sure you have filed all of your tax returns for the past 6 years. If you have not filed, the IRS will not set up a payment arrangement until all returns are filed.
  2. Determine if you qualify for penalty relief. If so, request it immediately to lower your liability. The IRS will still try to collect when a penalty abatement determination is pending, so continue immediately with determining your ability to pay.
  3. Determine your ability to pay based on last three months income and the actual expenses you have paid. This amount is called your monthly disposable income. If you owe $65,000, the IRS will want between $1150-1300 in a conditional installment agreement. If your average income and expenses from the last three months leaves you with less than $1300, chances are you qualify. If it is more, then your payment will be the higher amount.
  4. Determine if you have equity in assets that the IRS will want first (i.e. retirement plans, equity in homes, or selling any stock or recreational property). If this is likely, you may want to use these sources to pay your debt. If it will not pay it in full, you may want to pay the IRS balance under $25,000. At $25,000, you will qualify for a 5-year, streamlined installment agreement of $500 a month until the debt is paid in full.

Jim Buttonow is one of the resident debt experts here at GetOutOfDebt.org that helps people for free. Jim is a licensed CPA who spent 19 years with the IRS coordinating large compliance teams of IRS agents and specialized personnel. In the last 5 years, Jim has invented consumer and practitioner software and treatises on how to address many different tax issues. He has also represented many people before the IRS examination, collection, filing, and appeals functions. He currently assists taxpayers on an active pro bono tax practice aimed at serving people in need. He can be reached at IRSMind.com.

If you have a tax question you’d like to ask just use the online form. I’m happy to help you totally for free.

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Jim Buttonow, CPA/CITP, practices in the area of IRS and State tax controversy. He has more than 29 years of experience in IRS practice and procedure. Reach Jim at jim@buttonowcpa.com or through his website www.buttonowcpa.com

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