Nobody likes those notices. The bad thing is IRS wants some money, and if the changes are correct, Virginia will want some, too. The good thing is you can, and should, review the notice to insure it is correct. First, make any corrections you can to reduce the taxes due, then payment arrangements can be made.Education credits
are more complex than most people realize. The credit is not just based on what was paid. I suggest you consult a tax pro in your area, and/or review the calculations in IRS Pub. 970. It's complex because of the fiscal year reporting at many schools, versus the calendar year for most taxpayers. I just fixed one of these notices for a client, and was able to claim substantial credits due to that issue.
Inherited IRA accounts are taxable, since there was likely a tax benefit received when your Mom contributed. If there is a difference between what your 1099 said was taxable and the IRS position, I would want to know why. Again, a review with a tax pro makes sense here.
Ok, so let's say the pro corrects the IRS notice and you owe $1,500, and that's still too much to pay all at once. First, you have to add the Virginia amended return
to report the income to them, and maybe they want an extra $300.
Pay the state bill first, as it is likely manageable. Then, IRS will work with you to allow for formal installment payments on the amended return you file (correcting some of the IRS math) and add Form 9465. On it, you specify how much you want to pay, and when, and for how long. Approval is essentially automatic, and you can even set up direct debit to make the monthly payment.
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