Handling an Inheritance Well and Dealing with the IRS Both Require a Game Plan
While not always easy to think about, an inheritance is a part of the financial picture for many baby boomers. That was just one of the topics that popped up in my inbox this past week.
Dear Mary: Before reading your book “Debt-Proof Living,” I believed we were doing just fine with our money. Recently, my husband’s father died and we received a small inheritance. We sat down to decide how to handle this money. I pulled out the book and showed my husband the chapter on the 10-10-80 formula and the information about the Freedom Account.
We figured out our expenses. We were shocked to discover we’ve been spending almost $1,800 more than we make each month. I guess we didn’t notice because we would take a little out of savings to cover expenses as needed. At this rate, all of our inheritance would be gone in no time. Needless to say, I became rather depressed as we started reducing the outgo to balance our expenses with our income. We are looking at every area of spending and have already found so many ways we could make the adjustments.
My husband actually thanked me this morning for all the work I’ve been doing on our budget. He always wondered why it seemed we were making good money but never able to save any. Now we know. I am telling you all of this to say thank you! I know it will take work, but at least we are on the right track. I never would have figured this out if it hadn’t been for “Debt-Proof Living.” I’ll keep you posted on our progress. — Kimberly
Dear Kimberly: Your letter reminded me of an interesting statistic I came across recently, which said that it takes an average of 17 months’ time for a person to completely spend an inheritance. Aren’t you glad you won’t be part of that statistic? So am I! Thanks for writing. Your letter made my day.
Dear Cheapskate: My daughter and son-in-law did not pay up a credit card account many years ago. They got into financial trouble due to unemployment. Now they have to pay a fine with the IRS and the IRS has set up payments for that fine. The IRS claims they are being fined for this forgiveness. What do you think? — Noreen
Dear Noreen: From what you tell me, it appears that this credit card debt was charged off by the creditor. The borrowers defaulted on their debt, so the creditor did a legal maneuver and wrote it off as a bad debt against its taxes. The law requires that when this happens, the creditor (in this case, the credit card-issuing bank) must file a Form 1099 with the IRS, declaring that the amount written off — plus accumulated interest and penalties owing — becomes ordinary income for borrowers who defaulted on the loan.
The IRS is requiring them to pay the taxes they legitimately owe on money they received but did not repay. This will not go away. The IRS will charge interest and penalties on top of all that the bank charged them in their effort to collect what turned out to be a bad debt, which they charged off.
Left unpaid, it will just grow and grow. And grow. The last entity on Earth anyone wants to owe money to is the IRS. While they didn’t ask, I’ll offer my unsolicited advice: Do whatever it takes to pay the IRS in full as soon as possible, if not sooner.
There does exist a viable option for which your kids may be eligible. Given by the IRS itself, this option is known as Offer in Compromise.
Generally, this allows delinquent taxpayers to settle tax debt for less than the full amount owed. While I do not have personal experience in exercising this option, I do know that the IRS generally approves an Offer in Compromise when the amount offered represents the most the IRS can expect to collect within a reasonable period of time. Go to www.irs.gov/payments/offer-in-compromise for more information including eligibility and how to present an offer.
Submitting an Offer in Compromise is not for everyone and should be seen as a last resort. Always explore all other payment options before taking the Offer in Compromise route. And should they and others reading this hire a tax professional to help with filing an offer, be sure to check that person’s reputation and qualifications.
Even when this debt is paid and settled, the original amount will most likely still show up in your kids’ credit files as “charged off,” which is just one level above bankruptcy as credit reporting goes. It will remain for up to seven years, making it difficult for them to borrow in the future. Maybe that’s a good thing.
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