My girlfriend has not filed taxes for 2004-2011. When she filed for 2012, the IRS seized her refund and sent her a letter stating it was applied to previous tax debt.
She has spoken to the IRS and they have determined she owes $80,000 for 2004-2007 but have given her 30 days to file returns for those years to reduce her debt.
She ran a business out of her home for all the years in question, and incorporated into two LLCs from 2008-2011.
She will be receiving a monthly life insurance annuity payment for the next two years from a parent’s death.
The IRS has not calculated her taxes for 2008-2011 yet.
She has five children; she allowed the fathers to claim the children on their taxes so they could receive refunds. As a result, she will not be able to claim them as dependents, although they lived with her the majority of the time.
She is currently attending college full-time and working a full-time job. She has two vehicles; my name is also on the titles, and one of the vehicles has an outstanding loan that is approximately 75% of the car’s book value. The other vehicle is 21 years old.
She is currently working with a tax preparer to get all of the returns filed so she can have an accurate amount of taxes owed. I know her income for that period was somewhere around $600,000, maybe a little more
Will the IRS levy her annuity payments and count them as income for an installment plan to repay the debt? The annuity payments are over twice what she actually makes in a month and they will be ending in March 2015.
Can she deduct medical expenses and childcare expenses if she was the childcare provider since she was state-licensed and the children reduced her income-generating occupancy?
Also, will they seize the vehicles with my name on the titles?
Finally, how the IRS determine the penalties and methods of collecting the debt? I looked at the IRS website, but several things seemed contradictory.
Here is a summary of your facts:
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- Your girlfriend has unfiled tax returns for 2004-2011
- The IRS has filed returns (called substitute for returns) for several of these years- the tax assessed is approximately $80,000 for 2004-2007.
- The IRS has not yet filed returns for 2008-2011
- You are preparing original returns and will file them within 30 days to the IRS- at that time you will have a “correct” liability owed
- The IRS took her refund for 2012
- She has income from a life insurance annuity, which will end in March 2015
- She is in college and has 5 children who she does not claim as a dependent for 2012
- She is also working full time
Your questions and answers:
- Will the IRS levy her annuity payments and apply them toward her balances owed? This depends. The IRS will levy all payments and assets, including annuities, wages, and bank accounts if she does not enter into an agreement with the IRS (i.e. an installment agreement or other arrangement)
- How will the IRS treat the annuity payments for an installment agreement? The IRS will determine her ability to pay based on her monthly disposable income- that is, all income less allowable expenses. Annuity payments are included in the income. However, when they expire, she can lower her installment agreement payment with the IRS.
- Will the IRS allow business expenses in an installment agreement? Yes. The IRS will allow her to reduce her gross income with expenses that are necessary to produce that income.
- How will the IRS determine penalties on the late filed returns? The IRS will automatically assess a failure to file penalty (5% per month, maximum of 25%) and a failure to pay penalty (generally 0.5% a month, up to 25%) on late returns with a balance due. You can request abatement of these penalties if you have “reasonable cause” – i.e. a reason why she could not file and/or pay timely. Long term illness and other hardships are examples of reasonable cause arguments.
- Will the IRS seize the cars? The IRS almost never seizes property unless there is a very egregious situation. They will want to set up an agreement. If the IRS seizes property, it will almost always be in the form of a levy on wages, bank accounts, and other income. Personal asset seizures are very rare and do not make good business sense for the IRS.
My recommendation: file ASAP and be proactive on setting up an installment agreement with the IRS. If you can get the balance below $50,000, you can set up a “streamlined” installment agreement- that is, a payment arrangement over 72 months. If you cannot meet these terms or cannot pay over 72 months, you will have to set up an agreement based on her ability to pay.
Ask for extensions during this process if you need them. However, do not miss any deadlines and work to setting up an agreement based on her ability to pay.
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.
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