Most people start to worry about their tax liabilities when they near the retirement age. Retiring with unpaid tax liabilities is one of the biggest financial mistakes you can make. Most people are not clear about what the IRS can and cannot do, so getting expert advice is always a better option. You’ve come to the right place if that is what you are looking for.
The IRS gives plenty of options to clear your tax debt. Some of them can reduce your total liability by a significant amount. Also, there are possessions that the IRS can not touch.
The IRS has legal rights to claim properties if you have a mountain of back taxes. It generally does not reach that point unless you neglect taxes for too long. Unpaid taxes can become a huge burden after retirement. Below, we will explain how resolving tax debt before retirement can give you more security and how you can do it.
Why It Is Bad To Retire While Carrying Tax liabilites
Back Taxes, or tax liabilities, are the accumulated form of past taxes you missed. The IRS can collect these taxes by force if they need to. In most cases, they won’t take drastic actions if you stay in touch with them. But they might garnish your retirement funds or other income sources.
That usually happens to IRS federal taxes. That is why it is never a good idea to retire while carrying a large tax debt. They start by levying a part of your pension and retirement account.
The creditors usually protect these funds heavily. So, it takes a long time for them to get the necessary paperwork done to tap into them. The IRS will also send you a reminder to clear your delinquent tax liabilities. They will proceed with the forceful seizure if you choose to ignore them.
What Can the IRS Rightfully Levy?
The IRS can levy all forms of retirement funds or plans. That includes IRA, 401k, stock bonus plans, pensions, and even self-employment retirement funds. Pretty much any retirement fund you can think of.
They won’t start levying your funds without giving you proper notice. That also means you can’t keep anything from them. They will do an audit to figure out the value of all the assets you have.
The IRS can garnish up to 25% of your retirement funds until you pay back taxes. They will wipe your debt clean if you can maintain that status quo for ten years. But by then, you will have lost a significant part of your savings.
Things IRS Cannot Levy
To begin with, the IRS cannot levy the SSI payments if you are eligible for that. They cannot seize personal effects, clothes, furniture, and other essential items either. The only condition is that the total value of your possessions cannot exceed a certain amount.
They also can not take the tools and supplies one needs to make a living. That part does not count if you are retiring, though. The IRS also can not touch your house if your tax debt does not cross a certain range.
They will also exempt a part of your income if you need to pay child support or similar expenses. In most cases, the IRS only garnishes a small percentage of a person’s funds. They need to leave enough to ensure the basic livelihood of the taxpayers. That includes any dependents too.
You can also appeal to the court to limit the amount they can garnish. But you will need to show enough reasons for doing so. They will agree if you can convince them that taking any more will land you into a financial crisis.
How To Resolve Tax Debt?
There is also a tax forgiveness fantasy that some people live with. A figment of imagination, if you want to call it that. They sound decent on paper, but the deal is little more than a distraction. Most shady organizations offer that type of deal. And going to them will only waste your time and money.
What you can legitimately find are tax programs by the IRS. Pick one that you qualify for, and it might save you from a lifelong debt. You can also get professional help to guide you through it.
That brings us to the question- how can one resolve this tax debt within a reasonable timeframe? There are several ways to reduce debt. The problem is that these processes are very complicated. Here are some options for resolving tax debts:
- Tax Programs
There are plenty of helpful tax programs out there. Programs like the Fresh Start Initiative, State Tax Relief, and Tax Settlement are great options. The state taxes are more brutal than the IRS. They have a history of playing heavy-handed. So, getting the state tax sorted out before retirement is a must.
State tax relief plans will help you sort out the mess with state authorities. But the hard part is getting approved for the program. It’s better to seek professional help for this one.
The Fresh Start initiative is a relatively new program that can help reduce your debt. It can reduce debt to a point that the ultimate debt seems negligible. The payment plan is like an agreement. It’s where the IRS allows you to pay back taxes in installments over a set timeframe.
The Tax Settlement program lets you pay less back taxes. Meaning, the IRS will accept a lesser amount, but it mostly works like a bargain. You need to negotiate with the IRS authority and show valid reasons. It’s always better to let professionals handle anything that involves negotiations.
- Offer in Compromise
Offer in Compromise or OIC is likely your best bet at clearing tax debt. It is a program that reduces your total tax debt. Meaning, you now have to pay only a small part of it. That’s the only positive side of this deal.
I’m sure you know that nothing comes free, and there’s always a catch. The approval rate for this program is abysmally low. And you would need to wait a long time to hear the news. The worst part is not the low approval rate or the waiting time, though. The shady part is that the waiting time won’t count towards the statute of limitations.
The statute of limitations is a ten-year assessment period. After which, the IRS clears any of your existing debt. After you apply for the Offer in Compromise, this time stays suspended till your ruling comes out.
There is every chance this process can backfire. You need to send all your financial reports to request this program. The IRS can take your assets if they see that they cover your debt. Your assets include your retirement funds too.
- Innocent Spouse
This one depends on marital status and does not apply to a lot of people. It is one of the best ways to get tax relief if your spouse or format spouse wrongly handled the matter. That includes omitting or giving false information to the IRS.
In this situation, the IRS will relieve your side of the tax penalties and interests. This means you can avoid a sizable part of the responsibility. But qualifying for this program is complex, and it has stringent conditions.
- Currently Not Collectible
The last and most desperate option is the CNC, or the Currently Not Collectible program. This one could let you get away without paying a cent. But you need to be truly incapable of paying for this to work. That means you need to be almost in a financial crisis to get approved for CNC.
You need to be in a financial situation where paying even a little bit towards your debt puts you in a financial crisis. The CNC status is also not a permanent solution. You can not improve your financial situation after getting the CNC approval. The IRS will monitor your finances and revoke the status if they deem you incapable of paying.
The worst part about the CNC is you can rarely get approved for it if you have a retirement fund coming up. They count those accounts as your assets. They can then start to garnish those funds to clear your debt.
Well, the good news is the IRS is not entirely heartless. They do provide you with enough to live a decent life, but there’s very little security in there.
How We Can Help
Here at Safeway Tax Relief, we will help you negotiate with the authorities to get the best deal possible. Our tax professionals can point you to the right tax programs that will help protect your retirement funds. Our team consists of bonafide experts in the field with a combined experience of over 135 years. If it is anything tax-related, we will get it done.
Conclusion
We hope you now understand the necessity of resolving tax debt before retirement. There are plenty of programs to choose from. Each has its pros and cons.
But the crucial part is getting approved for one. Our job as tax professionals is to get you approved for these deals and save your savings.
