Many American taxpayers will experience an IRS problem sometime during their lifetime.
While this can happen to anyone, when it happens to celebrities, it's a talker. Take comedian Steve Harvey. In 2008 he discovered that he owed the IRS a whopping $25 million.
Strangely, there was little media coverage of this case at the time. Normally, when a celebrity runs afoul of the IRS, it's front-page headlines. After all, the IRS loves a media storm to scare miscreants into line.
"My old tax accountant, who passed, had done some, let's say, not so smart things," recalls Harvey. "And since he's not alive anymore, and I don't slam people who are gone, so let's just say some bad things were done and I looked up and I was in a lot of trouble to the tune of almost $25 million."
Harvey had just married and was concerned that he would not only lose his money and possessions, but that he might lose his wife as well.
"I sat my wife down and she cried and I held her and I told her it was going to be all right; I was going to get us out.
"I just went to work. I took every gig and every contract and I worked and worked. I hung in there and I had a big deal come through in 2012 and I got free. And it's been OK ever since."
Not the first celebrity to get in trouble
Wesley Snipes in 2008 was sentenced to 3 years in jail for willfully failing to file tax returns. He was affiliated with an organization involved in illegal tax-evasion schemes.
It is illegal to not pay your fair share and technically the IRS could have put Harvey in jail. But that would have been counterproductive. An IRS agent once told me, "We don't want to put taxpayers in jail. We want them out there working and paying taxes."
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If you step forward with a plan, you will find redemption, as did Harvey. He says that his resolution came through "a lot of prayer and grace." The sale of Harvey's radio network in 2012 provided the funds to pay off the IRS. "It was a lot of money and it saved me."
Ordinary folks do not have these kinds of assets to convert to cash to remedy a mega-tax bill. But they can follow these ways to prevent and resolve IRS problems.
How to prevent IRS problems
- Tax planning is crucial to preventing surprises on April 15. If you experience a major life change during the year -- lost a job, changed careers, became self-employed, changed your marital status, gained or lost a dependent, bought or sold a house, cashed out a retirement plan -- then it's important to sit down with your tax professional to crunch the numbers. That way you can begin saving and prepaying for a potential tax burden or discuss other ways to minimize it. You must do this sort of planning now -- not in December, and certainly not on April 14.
- Before filing your tax return, check it to make sure all income and expenses have been properly recorded. Compare your source documents to reported items to ensure accuracy. And make sure to keep copies of all pertinent receipts in the event of audit. Oftentimes a tax debt will arise due to disallowed items in an audit.
- Use a bona fide tax professional whose office is open year round. Make sure your tax professional is licensed. Use a Certified Public Accountant, an Enrolled Agent or an attorney, especially if you have a complex income tax return because you own rental properties, unusual investments or are self-employed.
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How to resolve IRS problems
- If you can't pay the balance in full, but you believe you can pay it off over time, then apply for an installment agreement. This can be done online at the IRS website using its online-payment-agreement application. Your application will be accepted if you owe less than $100,000, but can pay off the balance in a very short term. You may also apply for an installment agreement when you file your tax return by including Form 9465 with the return. There is a user fee for an installment agreement. However, the fee is reduced if you elect auto debit from your bank account. If you default, the installment agreement will be rescinded and the IRS will want payment in full or it may attempt to levy your bank account or wages. If you cannot make a monthly payment, it is important to call them to let them know.
- If you cannot pay your balance at all because you lost your job, became disabled or some other event occurred that precludes payment of your debt, then the IRS may deem you "currently not collectible." Upon acceptance of this status, the IRS will disband all collection efforts. Penalties and interest will continue to accrue, but you will not have to worry about your bank account, home or income being levied. If you file a tax return showing an improvement to your finances, the IRS will contact you to set up payment arrangements or possibly render you uncollectible again. Complete Form 433F. It uses a set of national standards to determine how much is allowed for housing, groceries, vehicle expense, health care, etc. Consult with a bona fide tax professional with experience in this area to help you.
- If your financial situation appears to be a permanent problem -- for example, you are now 65, disabled and on Social Security with no other source of income -- then you may qualify for an offer in compromise. This process allows you to offer a lump sum payment (which can be paid off in installments) for the tax debt. The amount for which the IRS will settle is based on a special formula using your financial information. To find out if you qualify, use the OIC Prequalifier questionnaire on the IRS website. It's wise to have a professional that specializes in this area to help you. But be wary. There are many unscrupulous individuals that promise relief but don't provide it.
Once you've resolved your tax issues, you can smile and say, as Steve Harvey did, "I don't have any tax problems now. Me and Uncle Sam are partners. We're Siamese twins now, yeah!"
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