1) OWING THE IRS YEAR AFTER YEAR: Do you to owe the IRS year after year? The is called “pyramiding” by the IRS – the pyramid of your tax debts grows bigger. The IRS can work with us if we stop the problem – what’s done is done. But not getting into compliance and paying taxes going forward results in little mercy from the IRS. Simply put, there is no negotiating to stop them when the problem has not stopped.
If you are self-employed, that means making estimated tax payments. To do that, I recommend that we open up a new, separate bank account, and name it your estimated tax account. Every time you get paid from a customer, we want to take a percent of that payment off the top and escrow it in your estimated tax account. That percent is simple: It is calculated on the ratio of your gross income to your taxes. For example, you are paid $100,000 gross in a year, and that results in a $10,000 in taxes owed to the IRS, your tax rate is 10% of your gross income.
So every time you get paid, 10% of that check would get set aside for the IRS in the estimated tax account. You pay as you go, pay as you get paid. Demonstrating to the IRS that you are setting money aside in an estimated tax account truly can take the sting out of past mistakes.
2. UN-FILED TAX RETURNS: If you have un-filed tax returns, the IRS will not hold back until you get in compliance. This is like not paying year after year. An end has to be put on the problem to negotiate out of it. If you have unfiled tax returns, the IRS will not relent until you get them filed. And how does the IRS get your attention to get those returns filed? They will levy your wages and bank accounts.
If you do not file the returns, the IRS has the law on its side in being able to start an investigation and prepare the returns for you. The IRS calls this a Substitute for Return. It is an IRS estimate of your tax liability, and usually result in you owing much, much more than if you filed the return on your own. The good news is that in most circumstances the IRS will still accept the original return after they have filed a Substitute for Return. But problems with getting your returns in is a sure-fire way to provoke the IRS into levying you.
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