Who’s afraid of the Big Bad… IRS?
Remember that goofy song? “Who’s afraid of the big bad wolf, the big bad wolf, the big bad wolf…” Now, substitute the IRS for the wolf and see how long it will take to get that tune out of your head.
Was it tough to get rid of the annoying song? Trust me: it is far more difficult to get rid of the real wolf, err – the IRS, when it comes knocking on your door. Especially since many of your recordkeeping houses are built of hay and twig, at best.
I am less than thrilled to report that the wolf has grown bigger and badder. You would think that the IRS should give you a break in the current economy. Unfortunately, as of this writing, they are going in the opposite direction: IRS audits are much more frequent and more detailed, and IRS collectors are getting more aggressive.
Ready for more bad news? Real estate investors are among several “lucky” businesses that are specifically targeted by the IRS lately.
Since the wolf is not going anywhere, it is wise to do two things: understand what the enemy is capable of and build our defenses in advance.
Why is the IRS after us?
Simple: because the government needs money, and this is not likely to change. Millions of Americans owe a lot of money to the IRS. Not many of us would volunteer to pay if not for the threat of the IRS enforcement.
Can they put me in jail?
Not really, unless you have the visibility of Bernard Madoff or Wesley Snipes. The IRS does have criminal investigators with guns and badges, but these guys focus on fraud. Fraud means intentionally lying to the IRS: hiding income or making up non-existing expenses. Such creativity can indeed put you behind the bars. However, if all your crime is missing receipts and owing money to the IRS – you are not a candidate for free government housing.
Does it mean I have nothing to fear?
Not quite. If you owe money to the IRS, they have tremendous powers to collect from you. They can (and they will!) grab your paycheck, your Social Security, and your bank account, not to mention your investment properties. Worse, unlike other creditors, the IRS can seize your 401k and IRA money. Until recently, IRS taking somebody’s personal residence was almost unheard of – but not any more. Yes, you can lose your own house to the IRS. Yes, even in Texas.
But I really have no money to pay them!
Unfortunately, they may see things differently. When we say “no money”, we usually mean that we have no money left after paying our living expenses. Here’s a shocker: the IRS does not consider our living expenses necessary. It does not matter to them how large is your mortgage and how high your property taxes are. The IRS will only allow you about $1,500 a month for housing – including mortgage, taxes, insurance and utilities. What, you spend more than that? Not their problem. The IRS will demand that you pay them the difference between what you really spend and what they allow you to spend. As far as IRS is concerned, you can downsize to a studio apartment without A/C.
They say on TV that I can settle with the IRS for pennies on the dollar.
They also say on TV that you can get rich overnight without living your bedroom. Have you tried? I guess, it depends on who you share your bedroom with.
Yes, it is true that there are various ways to handle your debt to the IRS. Sometimes, you can set up a payment plan. Sometimes, you can even reduce the balance of what you owe them. The emphasis is on the word sometimes. From these TV ads, it appears that you can simply negotiate with the IRS.
- Look, I owe you $50,000. How about I give you $500, and we call it even?
Sorry, folks, this does not work in the real world. If you think negotiating a short sale with a bank is tricky – dealing with the IRS collectors is even less fun. Besides, you have much more to lose if you mess up.
Does it mean that my only option is bankruptcy?
Not even bankruptcy. Recent debts to the IRS will not be wiped out by bankruptcy. If you owe the IRS and cannot pay, you need to see a tax professional who specializes in fighting the IRS, not just your regular accountant.
You are usually better off with a local expert rather than with some huge national company. You need to know who actually handles your case and be able to trust this person. This is a very complicated game, and the rules keep changing.
Will the IRS give me time to work out a solution?
Probably yes, but only if you stay in touch with them. The worst thing you can do is ignore them. Then the full wrath of the IRS machine will be on you. Trust me: they do not just “go away” if you ignore them long enough.
Whatever your situation is, make sure that you respond to the IRS letters. The deadlines on these letters are important! If you are afraid to call them, hire an experienced professional to represent you.
Then you will not be shivering from fear inside a little house built of straw, all by yourself, listening to the heavy breath of the Big Bad Wolf outside your door.