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taxexpert89
taxexpert89, Enrolled Agent
Category: Tax
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Experience:  Provided tax preparation as well as tax resolution to thousands of taxpayers in all different socioeconomic classes.
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I owe 2012 back taxes to the Federal Government and to the

Resolved Question:

I owe 2012 back taxes to the Federal Government and to the State of Wisconsin. I have made some payments to both but still owe the Federal Government $29K and the State of Wisconsin $14K. The Federal Government said if I got it below $25K I would not have liens placed, the State of Wisconsin said if I got it below $10K they would not place liens either. Both said I could then submit a form and request monthly payments.

Here is my dilemma. I took early withdrawals from my IRA over the course of 2012 for various reasons including financially helping out my sister-in-law in our family business which I stepped down from in 2010. I did it to one, keep the bank from foreclosing and two to get back in and help run the LLC. Up until this point my sister-in-law has not paid me back and has not let me back in the business. I stepped down in 2010 to keep the bank off our backs and my sister-in-law told me at that time albeit a verbal agreement that when all the loans were updated she would let me back in. This happened earlier this year. I am still on the outside looking in.

Need some direction...
Submitted: 9 months ago.
Category: Tax
Expert:  philip.simmons replied 9 months ago.
Thanks for the chance to help. I am an attorney with over 12 years experience. Hopefully I can help you with your legal question.

Are you looking to sue your sister for the money she owes you?
Customer: replied 9 months ago.

What are my options? If you add up what I borrowed the business including the interest and penalties for early withdrawals it adds up to more than I owe the Feds and State. The LLC is stable but no in the position to pay me back.


 


Besides suing are there other tax relief options available?

Expert:  philip.simmons replied 9 months ago.
Thank you

Can you tell me a bit more about how these loans occurred and over what timeframe?

Specifically

1. Was this one agreement (one loan agreement) or several?

2. Are the agreement(s) in writing? Signed by both?

2. How long ago was the (earliest) agreement?
Customer: replied 9 months ago.

1. several


2. verbal, I gave the money to the business from my checking account


3. Summer of 2012


 


Obviously I did not realize the tax ramifications of what I was doing and now I am facing something I can not pay back very easily. No bank will give me a load because I have no collateral.


 


If the business cannot afford to pay me back of I am not let back into the business what are my options from a tax relief standpoint?


 


 

Expert:  philip.simmons replied 9 months ago.
Let me send this to a tax expert...just a moment please....
Expert:  Robin D. replied 9 months ago.

Hello and thank you for using Just Answer, As you were no longer involved in the business, you may have a Bad Debt that you could claim on the loan to the business or your sister-in-law. If someone owes you money that you cannot collect, you may have a bad debt. There are two kinds of bad debts – business and nonbusiness. Generally, a business bad debt is one that comes from operating your trade or business. Unless you are in the business of making loans then your's would be a nonbusiness bad debt. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. You will need to show though that there is not an expectation that you will be able to collect. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. You will have to state all the circumstances of the loan and why it is not collectible and why you determine you will not be able to collect in the future. A nonbusiness bad debt is reported as a short-term capital loss on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and “bad debt statement attached” in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It is subject to the capital loss limitations. The limitations mean that if your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately. Of course you would be allowed to carryforward the loss. I sincerely XXXXX XXXXX is helpful.

 

Please let me know

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 6912
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 6 other Tax Specialists are ready to help you
Expert:  taxexpert89 replied 9 months ago.
Thanks for the opportunity to provide you with helpful information. I am an enrolled agent and I provide tax resolution services to individuals that can not afford to pay their outstanding tax obligations in full.

To get started I will need you to provide me with additional information.

1. What are your goals in dealing with the outstanding tax obligation?

You can always set-up an Installment Agreement with the Internal Revenue Service and pay off your debt on a monthly basis, however, interest and penalties will continue to accrue on the debt until paid in full. This method works best when you can afford to pay them a substantial amount on a monthly basis.

2. An Offer in Compromise could potentially be an alternative route for you when dealing with the Internal Revenue Service. This Offer is based on multiple factors one of which is what the Internal Revenue Service calls your Reasonable Collection Potential (RCP).

If you have no assets and you are nearing retirement age or you are of retirement age and you can provide a financial disclosure which identifies your monthly income vs. expenses with no real disposable income this may be the route for you. Of course you will need to provide all substantiating documentation i.e. bank statements, retirement account statements, etc.

Your current medical condition could play a role depending on your individual circumstances. You could have a healthy income but you have necessary expenses that you must pay out for on a monthly basis to maintain yourself and household and can not afford to pay this obligation in full. An example would be hefty medical expenses for a dependent that is terminally ill or suffering from paraplegia.

All these factors would go into your Offer in Compromise which can take at least a year to resolve but you would potentially expend the least if you qualify. Refer to form 656-B Offer in Compromise booklet for more information.

You can always have your 2012 tax return reviewed to ensure all the necessary and allowable deductions were taken on your behalf to reduce your taxable income, thus, reducing your tax liability. If a tax consultant in your area reviews your tax return and finds points for amending you can always submit a 1040X ( Amended U.S. Individual Income Tax Return) to reflect the changes and reduce the tax burden.

Again it all depends on your current financial situation and what you'd like to accomplish so based on what realistic goals you set I can provide you with the line of best fit or the best route.
Customer: replied 9 months ago.

1. I would like to write off the money I gave the LLC including the taxes and penalties I found out I had to pay for early withdrawals. Then I would like to make monthly payments until it is paid off.


 


2. I will review form 656-B

Expert:  taxexpert89 replied 9 months ago.
You will be limited to the amount that you can write off in the 2012 tax year to $3,000.00 or $1,500.00 (if MFS) since it will be deemed as a capital loss reportable on a Schedule D granted it became a worthless non collectible debt in 2012. You will need to amend your tax return for 2012 to include this loss and carry forward the remaining loss to future tax years. The early withdrawal penalty and any additional taxes you are subject to for the 2012 tax year can not be written off as part of the loss.

You will need to use Form 9465 (Installment Agreement Request) to set-up a payment plan with the Internal Revenue Service. Once established penalties and interest will still accrue on the outstanding obligation until the debt is paid in full. At the end of your arrangement you can also request a penalty abatement Form 843 for any penalties that would have accrued on the debt over the life of the debt.

I do hope I was able to provide you with the direction and information you were looking for.

Feel free to contact me here at Just answer if you require clarity on the information presented.

As a token of appreciation please rate my response if I have adequately responded to your question. Thank You.
taxexpert89, Enrolled Agent
Category: Tax
Satisfied Customers: 3
Experience: Provided tax preparation as well as tax resolution to thousands of taxpayers in all different socioeconomic classes.
taxexpert89 and 6 other Tax Specialists are ready to help you

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