401K withdrawal and negotiating with IRS

[B R]

Hi There,

Before anyone answers my questions, please try to refrain from passing
judgment on how I have handled this. I did what I did for personal
reasons, and the whole thing is embarrassing to me. I really
appreciate any help offered here.

In 2011, I took a large sum of money out of my 401k (I lost my job,
had to move, and paid off debt).
I took out around $100k with only about $15k withheld for taxes. I am
at a 25% or 28% (may hit this with the withdrawal) tax bracket
(married with 5 dependents). In addition to the 25% tax, there will
be a 10% penalty and interest; to make matters worse, I am being
1099ed for some of the debt I paid off (debt forgiveness). The debt
forgiveness tax is particularly bad since it will have been taxed and
penalized once already. I probably overpaid on my income withholding
by around $5k, so I will probably owe somewhere around $25k. Because
I have changed addresses, I am not sure that I have all of the 1099s
sent to me, and I want to make sure to be as honest and open with the
IRS as possible so that they don't suspect I am hiding income (as I am
not). I will not be able to pay this entire liability off in a lump
some, but can pay somewhere between $600-$1000 per month.

I'd like to run my plan by tax professionals here, and see what they
think.

1. Do my taxes with all the information I have.
2. Include a note to the IRS indicating that I am not 100% sure if I
have received all of the 1099s dealing with debt forgiveness.
3. Either send in an offer and compromise or payment plan form (not
sure which yet) offering to make payments, but asking that they waive
all penalties and interest.
4. Once tax season is over, hire tax attorney to negotiate assuming
the IRS will not accept my final offer.

Is this a good plan?
Is it totally unrealistic that the IRS will negotiate under these
circumstances?
Another option is just to set up a payment plan including interest.
What should I do for step 3?

[B R]

meant to say first offer, not final offer.

[paulthomascpa]

"B R" <rdrb...@gmail.com> wrote

> I'd like to run my plan by tax professionals here, and see what they
> think.
>
> 1. Do my taxes with all the information I have.

That's what we all have to do.

> 2. Include a note to the IRS indicating that I am not 100% sure if I
> have received all of the 1099s dealing with debt forgiveness.

I wouldn't. It'll likely get ignored by the processors.
If you receive additional 1099-C's, then deal with it through an amended
return, or,
Wait for any notices and address them as (or if) they arise.

> 3. Either send in an offer and compromise or payment plan form (not
> sure which yet) offering to make payments, but asking that they waive
> all penalties and interest.

Well, you can't submit an offer with the return. You just can't. They'll
reject it outright.

You can however, send in an installment agreement request (Form 9465) and
lay out how you plan to pay off the remaining balance due. The $25k is going
to be tough. I think it'll not be automatically approved, but it's a shot
worth trying.

I would file the return with the 9465 attached, send in what you can with
the return and make monthly payments like you proposed on the 9465. Then
give it a few months, three maybe four, then contact the IRS if you haven't
heard from them. Chances are you'll have to do a more formal installment
agreement due to the large amount. If so you'll need to complete a 933
form, but it ain't all that worse than a loan application.

> 4. Once tax season is over, hire tax attorney to negotiate assuming
> the IRS will not accept my final offer.

You might not need an attorney, unless there are some legal issues that you
need to fess up to. Hire a local CPA or EA that can be that go-between with
you and the IRS. Probably cheaper. The 933 isn't that tough, but being
complete and organized is helpful. And depending on how often the CPA (or
EA) has done this kind of work, or worked with the collections office
people, things might flow smoother. That doesn't mean that your installment
agreement amount will be as low as you would like it to be, but that the
communications line would be clearer and cleaner.

Offer-in-compromises are tougher to get these days, but if you're flat
busted with little prospects of enough income to pay this off, that is worth
looking at. Talk it through with the CPA or EA to see what they recommend.
Setting up the installment agreement is going to be quickest and easiest.
Having one in place staves off the wolves, as it were, and as long as you
keep current on the payments, they'll leave you be.

> Is this a good plan?
> Is it totally unrealistic that the IRS will negotiate under these
> circumstances?
> Another option is just to set up a payment plan including interest.
> What should I do for step 3?

Payment plans (an installment agreement) does include interest and
penalties. The penalties rack up rather nicely, so any possibility of
getting funds from another source should be explored first.




--
Paul Thomas, CPA
www.paulthomascpa.com
Watkinsville, Georgia

[B R]

Thank you Mr Thomas,

Should I go ahead and do all of this without a professional, and get a
CPA once I start talking to the IRS? I thought of an attorney since
there would be negotiation, but I have a CPA I can see also.

So, I think my new plan is to file taxes and 9465, and see what
happens. Sound good to you?

Do you think I shouldOn Mar 21, 6:26 pm, "paulthomascpa"
<paulthomascp...@bellsouth.net> wrote:
> "B R" <rdrb2...@gmail.com> wrote