Can I reduce a tax settlement through reducing cash on hand?

Question

I have not filed my taxes for the past couple of years and owe around
$50K. I have about $60K in cash. If I use my cash to pay down my
mortgage will this make the IRS more likely to settle for a a lower
tax payment?

The IRS currently does not know how much I owe them or how much I
have? I'm looking at paying down my mortgage before I file. So if I
have zero cash and more home equity when I file will the IRS settle for more like $10K cash instead of the $50K?

Answer 1

Dave, paying down your mortgage in hopes of settling your tax liability for a lesser amount might be risky. The IRS looks at your earning ability and the equity in your assets. Since you are not on the verge of bankruptcy or living paycheck to paycheck, the IRS is likely to suggest that you obtain a second mortgage on your home, or to refinance your loan, to pay your tax debt in full, or alternatively, they can place a tax lien on your home and force its sale.

Since home mortgage interest is deductible to the extent of acquisition indebtedness and an additional $100k of home equity indebtedness, by paying down your acquisition indebtedness in the hope of a settlement with the IRS, you lose that amount of original acqisition indebtedness on which you can ever claim home mortgage interest.

You may want to consult with an attorney who settles tax liabilities with the IRS. He/she might be able to negotiate the large penalties for non-filing and substantial underpayments, but probably can't help much on the underlying tax due.

Answer 2

If you create $60,000 in equity, the IRS will probably 'suggest' a home equity loan to pay your taxes.