The Tale of the Dead-Broke Business Ownerby
On Halloween week, Liz Farr offers an especially scary story, one in which a once-successful business owner slowly lost all his money.
What do you do when all the money is gone, and you’re too sick to work, but the IRS is still after you? Unfortunately, sometimes the best – and only – option is to wait out the statute of limitations on collection.
At his peak, a client I’ll call “Jerry” had a successful consulting business. That company was his first success after a string of expensive business failures. After many years of struggle, Jerry was finally living it up. He liked to live well, so he bought a beautiful home in the mountains. He spent nearly every cent his business took in on cars, artwork, travel, fine dining and living the good life.
Except he forgot one teensy detail: taxes.
Jerry somehow neglected to pay his taxes for three or four years. He had filed his returns on time, but he hadn’t paid what he owed. My boss, an old friend from college, got him set up with an installment agreement and admonished him to find ways to cut his spending and set something aside for retirement, which was now only a few years away.
All went well for about two years. He was keeping up with payments, and, slowly, his mountain of tax debt was getting whittled down. He was even saving a bit of money.
Then, Jerry’s health failed. Suddenly, he couldn’t work anymore. It turned out that he had massively overextended himself. He could only finance his lifestyle and keep up payments on his many loans if he worked full tilt, and that was now impossible.
Bit by bit, over several years, his world fell apart. His collection of high-end sports cars was repossessed or sold. His lovely mountain home went into foreclosure. He sold everything he could. He moved into a tiny apartment in a seedy part of town.
He signed up for Social Security as soon as he could, but his uneven work history meant his monthly check was not that great. He had nothing else. Not surprisingly, he stopped making payments on his installment agreement. So, the IRS started garnishing his Social Security.
One day, despite not having been to our office for several years, Jerry showed up with a pile of IRS notices. I tallied up his debt by year and reconciled his payments to the IRS statements. Over the next week or so, I worked with Jerry to fill out the paperwork for an Offer in Compromise.
Filling out that 433-A was a sad exercise. There were way more blank lines than lines with numbers. He didn’t own anything that the IRS could possibly put a lien on. We looked at the schedule of tax debt. The oldest debt was nearly ten years old, so it would be uncollectible shortly.
We waited to file his OIC paperwork until the oldest debt dropped off. The amount Jerry could pay was just a drop in the bucket toward the nearly $100,000 he still owed. Unsurprisingly, the IRS rejected his offer. They did the math, and they knew they were coming out ahead by continuing to garnish his Social Security.
Sometimes, we can’t save our clients from themselves. If Jerry had come to us when he began his blockbuster consulting business, we could have helped him set up a budget to make sure he was setting aside funds for taxes, retirement and long-term savings and wasn’t taking on too much debt. If he had come to us even sooner, maybe we could have helped him avoid his earlier business failures.
Liz Farr, CPA, spent 15 years in tax and accounting at small firms in Albuquerque, NM. Besides tax returns of all flavors, she worked on audits of governmental entities and not-for-profits, business valuations, and litigation support. Now she's a full-time freelance writer specializing in content marketing for accountants and bookkeepers around...