IRS payment plan - 401k loan requested by IRS

[Strongsilence-CPA]

IRS wants my client to take a loan from her 401k.  Client adamantly refused as this is her only remaining savings. The IRS would not accept the agreement until she makes the loan.  She is considering taking a withdrawal of 100% of the 401k, then calling the IRS back to say she has no 401k.  This won't work; in effect she would not be fully truthful if she didn't also say that her bank balance increased (where she would deposit the loan.)  The IRS wants a $200 monthly payment.  She can pay $50 per month.

[sjrcpa]

Start making the $50/mo payment.

Expect IRS to eventually levy her wages.

[Strongsilence-CPA]

She is 69 years old. She owes $7,000. Fairness comes to mind so laugh at me.  

[BobKamman]

How much does she owe? How much is in her 401(k)?  How did IRS come up with the $200, has she already sent them the 433 financial statement that lists the 401(k)?  Does she think they are stupid?  Do you think she is stupid?  

[Strongsilence-CPA]

How did IRS come up with the $200, has she already sent them the 433 financial statement that lists the 401(k)? 

Bob,

We gave them the amounts verbally on the phone. And she admitted to having a 401k. Was that a mistake?

[sjrcpa · Accepted solution]

You can't lie to IRS.

IRS' computation of ability to pay is a higher amount than taxpayer's thoughts. IRS expects you to use all available assets. that includes 401(k) and home equity.

[sjrcpa]

Fairness comes to mind so laugh at me.

Not laughing at you, but to IRS there is:

Doubt as to liability

Inability to pay.

Fairness - no.

[BobKamman]

Sounds like she might owe less than $10K and qualifies for the "automatic" payment plan if it is paid off in three years.  Which, would require the $200 monthly if she owes something like $6,000.  That's why I asked how much she owes.  

[Strongsilence-CPA]

Thank you BobK

[George4Tacks]

You can not use the F word with IRS.

[sjrcpa]

2 basic tenets of tax law:

It doesn't have to make sense

It doesn't have to be fair.

[qbteachmt]

Why doesn't she take a hardship distribution from the 401(k) for the full $7,000? There's no penalty at her age, and with her standard deduction, it might not even hit the tax tables.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributi...

[BobKamman]

I didn't see the answer earlier, that she owes only $7,000.  So IRS gave her the 30-second answer, "pay us enough each month to pay it off in 36 months, and we won't bother you, and you can stop bothering us."  So if she doesn't want to take the money out of her 401(k) all at once, take $2,400 a year.  Is she still employed?  Is she one of those people putting off Social Security until age 70?  Does she own a house that would qualify for a reverse mortgage?  How did she end up owing $7,000, anyway?  "Fairness" means she has to pay her taxes just like most people.  

[abctax55]

"...Client adamantly refused "

OK - that made me laugh.  I was unaware that was an option with the IRS.

I agree with Bob's question - WHAT generated such a liability?   Wasn't there cash flow from that 'event'

There's gotta be more to this story.

[Strongsilence-CPA]

 Is she still employed?  Is she one of those people putting off Social Security until age 70?  Does she own a house that would qualify for a reverse mortgage?  How did she end up owing $7,000, anyway?  "Fairness" means she has to pay her taxes just like most people.  

I like the way you think.

She owns nothing. She is 69 and is dog walker and home health aide. Must have been a free spirit back in the day; following her bliss might have been her career.

She thinks she can do an OIC but the IRS won't let her until she takes the 401k loan.

I think I will advise her to take the 401k loan and pay off the IRS. And then the 401k loan will be her only debtor.

[Strongsilence-CPA]

I agree with Bob's question - WHAT generated such a liability?   Wasn't there cash flow from that 'event'

abctax, 

I know very little about her. See my reply to Bob.

I think she is going to get a loan from a friend.

Appreciate your help.

I have to move on to my next problem client.

[qbteachmt]

"I think I will advise her to take the 401k loan and pay off the IRS. And then the 401k loan will be her only debtor."

This makes no sense. At her age, take the distribution.

If she decides she doesn't want to repay the loan, she ends up with a deemed distribution anyway.

And do you know if her plan allows a loan after terminating employment? Just because the IRS suggested it doesn't mean the plan provides for it. An ex-employee doesn't always have access to borrowing from their old 401(k) because there is no paycheck from which to deduct for repayment.