Today TaxMama hears from Patrick in the TaxParlor who has this tale of woe, “In 2001 I withdrew about $70,000 from a 401K plan to open a new restaurant. I had just been laid off from my job and wanted to try something new. I opened a restaurant, and it failed. I ended up owing about $13,000 in taxes due to the early withdrawal penalty from my 401K. I filed for bankruptcy and asked for a payment plan from the IRS to try to pay the taxes. I have been paying $200.00 per month for some time, but actually have lost ground and owe more now than when I started because there are penalty and interest charges every year. Bottom line is that after 4 ½ years of paying what I could afford every month, I owe more now than when I started.
My question is, is there anything that I can do to try to get out from under this $13,000 burden? At $200.00 per month I will never pay this off and I can’t afford to pay hundreds of dollars per month.
Do I have any good options?”
Do you realize that restaurants have a 90% failure in the first year? And the few that survive one year, have a 90% chance of failing during their second year. Restaurants are about the riskiest business to ever get into. TaxMama’s two Restaurant Rules of Thumb –
1)Don’t open one without experience running one.
2)And never draw taxable funds, like pensions, to pay for them.
Just curious, how long after you filed the tax return for the 401(k) withdrawal did you file bankruptcy? Is it at all possible that the taxes should have been included in the BK?
If they should have been, but your attorney overlooked the taxes, IRS is willing to look at your bankruptcy documents and see if your tax debt was dischargeable. Just call IRS at the phone number on your notices and ask for the Bankruptcy Unit or Special Procedures Group.
If you filed BK too soon, well, how are you doing financially today? Are you back on your feet? Do you have a decently paying job? Or are you struggling mightily?
If your present earnings are very low, and you don’t have assets with equity, like your home, you may qualify for an offer in compromise. Take a look at IRS Form 656. It’s a whole 62-page package. http://www.irs.gov/pub/irs-pdf/f656.pdf
Use the worksheet on page number 8 to see if you qualify for an offer.
OR, if you do have equity in your home, see if you can get a 20 or 30-year 2nd trust deed with no prepayment penalty. Your payments will be lower. And when you do get back on your feet, you’ll be able to pay it off more quickly.
And remember, you can find answers to all kinds of questions about owing money and all kinds of other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips. Please click on the subscribe link and join us.]
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- IRS Form 656 :: Offer in Compromise package of forms – 62 page booklet