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Ask HN: Loaning money from the IRS?

4 points by nestlequ1k ↗ HN
Here's a question for freelancers out there. I filed an extension this year on my taxes, and have spent the summer working my ass off to get enough to pay taxes (self employment tax is a bitch). I owe the IRS about $25k which I have finally earned into a savings account.

So noow that I'm about to pay Uncle Sam, I'm thinking... what if I just delay and use the money towards a startup I'm currently working. I've been in this situation a few years ago (owed the IRS about 3k, and they put me on a monthly installment plan). In the current situation, I'd much rather pay 1500-2000 a month than hand over everything in lump sum. Also, it seems like interest on the tax only goes up to a certain point (20% of principal). So there's an upper cap to the penalty I'd be paying.

I know the best response to this "talk to an accountant/attorney", which I have an appointment with a tax accountant in the valley. However I'm curious if anyone's tried this, thought of trying this, or has gotten seriously screwed on something like this.

About my situation, I'm right out of college and have been doing freelance development. I own nothing (rent apartment, my car is on loan). So I can't see a downside of this plan screwing up, aside from maybe going to jail, which I think would be a stretch.

Has anyone been in a scenario like this?

6 comments

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pmorici
If you owe the IRS 25k wouldn't you have had to make like 90k+ in that tax year?

If that's the case what did you do with all that cash. It just sounds like a stupid idea to me. If you can pull down that sum in "a summer" aka 4 months, why not just pay the IRS their money and then work 4 more months and then start your business.

nestlequ1k
In freelancing, its very common to go on a hot streak. Last summer I had client paying me 100/hr, and I was working 80 hr weeks for almost an entire summer. After that client wrapped up, it was almost 4 months before finding something else at much less rate. Also, this was before the sept 08 market crash.

Pretty easy answer to say what I did with all that cash. Aside from living expenses, travel, and in some cases general overindulgence, I paid off about half my student loans.

Also did ok this summer, but that has also come to an end. Either I can work my ass off for the next few months to try to get another client (and then a few months after that to work with the client), or I can invest my time in a startup idea I have now. I've sort of already made the decision for the latter, I'm just trying to figure out how to stay afloat while I give the startup a chance to succeed.

mahmud
There is no worse loan-shark than the IRS. The rules:

1) Make sure you never have to pay them a dime, and

2) If you have to pay them a dime, do it NOW.

nestlequ1k
Hey Mahmud, thanks for your reply. Can you share what experiences you have to make you think that?

It seems the IRS has one thing going for it (and against us), persistence. They don't forget old debts, pretty much ever. However, in terms of harshness, it doesn't seem like they are too bad. How do they extract money from you? They could seize my bank account, but then they'll get what I already owe them anyways. They can't take my car, house, etc, since I don't own any of it. And they aren't the type to break people's legs (at least, I dont think).

mahmud
If you really want to do this, sit down with a CPA and make sure you keep the IRS posted every stop of the way.

My experience was that they were willing to seize my father's business and liquidate it, sending 12 employees and their families, not to mention my parents, into the street .. all for $80k.

nestlequ1k
Sorry to hear that about your father's business. Will definitely take your advise about talking with a CPA.

I'm sort of operating on the assumption that the worst the IRS can do is seize assets, none of which I have. It's probably a stupid, naive assumption, which I'm sure the CPA will chew me out for. However, I figure it's better to pull this kind of crap when you're young :-)