Rachel Cruze: The ‘Red-Flag Debt’ You Must Pay Off First

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You don’t want to owe money to Uncle Sam. If you do, Rachel Cruze wants you to pay it off as quickly as possible.

During the Oct. 25 episode of the “Ramsey Show” podcast, Cruze responded to a caller who owes $150,000 to the IRS. A series of unfortunate events led the woman and her husband to deplete their savings account, leaving them with nothing to pay their tax debt.

Cruze said tax debt is the type of debt that absolutely needs to be your top priority.

“The IRS debt is always kind of the red-flag debt,” Cruze said. “They can garnish wages, it’s insane.”

Since the caller and her husband are high earners, Cruze recommended immediately buckling down and sticking to a tight budget. This, combined with the caller really hustling with her real estate business, could allow them to pay their IRS debt off in approximately 12-13 months — or maybe even as few as six months, Cruze said.

To achieve this, Cruze said they will need to commit to a major lifestyle change. However, this sacrifice should allow them to eliminate their tax debt quickly.

Here’s What the IRS Can Do To Get You to Pay Your Debts

The IRS doesn’t mess around. If you owe the agency money, they typically have 10 years from the date your tax was assessed to collect the funds and any penalties and interest incurred.

Here’s three actions the IRS may take to get their money back.

• Legal Seizure of Your Property. If you owe the IRS money, what’s yours can become theirs. This may include taking money in your bank account or other financial accounts, seizing and selling your vehicle(s), real estate and other personal property.
• Garnish Wages. When the IRS doesn’t trust you to write a check, they can simply take money right out of your paycheck. If your wages are garnished, part of your earnings will be sent to the IRS each pay period, until you make other arrangements to pay your back taxes, you pay your debt off or the levy is released.
• Refund Offset. You might think you’re getting a tax refund, but if you owe federal tax debt from a previous year, the IRS may keep some or all of it to repay your debt.

5 Tips If You Owe Tax Debt

Owing money to the IRS isn’t a great position to be in, but you can get through it. If you need help tackling tax debt, you may want to consider reaching out to professionals. Tax Relief Advocates, for example, offers a free consultation where an expert will review your tax situation and suggest a custom plan. In some cases, they can work with the IRS to help you reduce the amount you have to pay.

Here’s are some ways you can navigate this situation on your own.

1. File Your Taxes

Don’t try to hide from the IRS. If you can’t pay your taxes, you still need to file a tax return. If you don’t, you’ll be assessed a failure to file penalty that can increase your tax bill by up to 25%.

2. Consider an IRS Payment Plan

It’s not uncommon for people to have trouble paying their tax bill. You might qualify for a payment plan, giving you a little extra time to come up with the money. The IRS offers both a short- and long-term payment plan, so research both options to see what works best for you.

3. File an Extension

The IRS allows you to request an extension of time to file your taxes. Do note, this is not an extension of time to pay. You still need to pay your taxes by the return’s original due date, but there’s a caveat. You can get an automatic six-month extension when you make a payment with IRS payment options and select Form 4868 or extension.

4. Take a 401(k) Loan

If your plan allows it, you might consider taking a 401(k) loan to repay your tax debt. However, this should likely be more of a last-resort option, as it could be costly. You’ll be required to repay the loan — including interest — according to the terms of the loan.

If you don’t pay it back in full, it will become a plan distribution. If you’re not 59.5 years old or don’t qualify for another exception, you may also have to pay another 10% tax on top of the amount of taxable distribution.

5. Get a Side Gig

Paying your tax debt off as quickly as possible is important. Taking on a side gig and devoting all of your net income — you’ll likely need to pay taxes on this money — to your tax bill is great way to achieve this. Instead of taking out a loan or borrowing from your savings, this approach will allow you to pay your debt, without damaging any other aspect of your finances.

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