This morning I met with a client who’s hit a rough patch in life. A little over 3 years ago, painfully, suddenly, his marriage ended. Subsequently, his business suffered. His income plummeted, his legal fees skyrocketed, and his emotions fell through the floor.
Over time, he’s been able to get back on his feet and start to put things behind him. Except for the IRS.
He’d reasoned all along that since his business had dropped so significantly, he’d owe practically nothing in taxes. Once the divorce was final, he’d figure out what to do about his taxes.
He learned that his ex had gone ahead and filed separately, but the prospect of having to catch up on a couple years of business record-keeping and preparing income tax returns was overwhelming for him. Besides, he didn’t have the money to pay an accountant, much less the IRS, even if he owed just a little.
Then he learned his accountant had moved out of town. A friend recommended he contact me, which he did about 2 weeks ago. He brought in some paperwork, promised to find other tax documents, and asked me to contact the IRS to see where things stood.
The IRS response was quick and predictable. He hasn’t filed in 3 years. Not filing is a criminal offense. The IRS told me he had two weeks to get things together. After that… well, you don’t want to wait around and find out what comes after that.
This morning when we met, my client was stunned that all 3 years were prepared and ready to file. He figured he’d have to file one year — but three? How much did he owe? What would the IRS do? All the unknowns were stressing him out. He hadn’t slept last night in anticipation of our meeting. His hands were literally shaking when he sat down at my desk.
I had good news and bad news for him. First the good news. He was correct about his income being down significantly. His income tax due — about $3,000 — wasn’t that much after all the deductions and credits, especially considering it was for a three year period. Now the bad news. Since he’s self-employed (paid on a 1099 basis), he owed over $5,000 for Medicare and Social Security — taxes he hadn’t anticipated. Operating as a Sole Proprietor can be costly; it’s something we’ll be quick to change for him starting in January 2016.
The fact is, not filing is more stressful than not paying. Once the returns are prepared, the numbers are known. Everything’s on the table, the lights are on, so to speak, and there’s no longer any monsters hiding in the dark unknown.
More importantly, not filing is actually a criminal offense. That’s worse than not paying! They put criminals in jail. But once the returns are filed, the possibility of being put behind bars is over. Sure, there may be taxes to pay, but that doesn’t mean they have to be paid TODAY. A tax professional can help you work out a payment agreement with the IRS that you can afford. Or, in the case of financial hardship, work out a deal with the IRS to halt collection actions while you re-establish yourself financially.
Or, as in the case of my client, if the amount owed is less than $10,000, you can automatically set up a payment agreement online with the IRS all by yourself. No special experience or expertise required! (That’s why those TV commercials start out with “If you owe the IRS $10,000 or more…” Because if you owe less than $10,000, you don’t need to hire an Enrolled Agent or attorney to negotiate anything in your behalf. It’s a “do it yourself” solution!)
ANCHOR ON THIS: If you have un-filed tax returns, get busy and get them filed. Don’t wait or delay because you don’t think you can afford to pay the taxes due. You can work out the payment part later, just get those returns filed. Once you do, you’ll probably learn, as did my client, that the ‘unknowns’ you feared are probably far more stressful and troublesome than what the reality is.