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401K withdrawal and negotiating with IRS

Hi There,

Before anyway answers my questions, please try to refrain from passing judgment on how I have handled this. I did what I did for personal reasons, but 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?

Reply to
B R
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  1. Once tax season is over, hire tax attorney to negotiate assuming the IRS will not accept my first offer.

not final offer.

Reply to
B R

Given your naivety regarding offer in compromise, penalty and interest abatement, and "negotiating" a tax debt, you should consult with a tax professional skilled in IRS Collection matters.

Reply to
paultry

I suggest you engage a tax professional BEFORE you file your 2011 return. It's possible you can avoid the 10% penalty on some of the 401(k) distribution, and tax on the forgiveness of debt. That person can also advise you about realistic payment options for the balance you do owe.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

 It's possible you can avoid the 10% penalty on some of the 401(k) distribution, and tax on the forgiveness of debt.  That person can also advise you about realistic payment options for the balance you do owe.

Thanks to both of you, and I will hire somebody. If I can't find get somebody good before the deadline, should I just file and extension and estimate the taxes? What do I do about the balance I owe?

Reply to
B R

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