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.
- Do my taxes with all the information I have.
- 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.
- 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.
- 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?