Nevada tax debt: Using a 401K to pay back taxes to the IRS
The IRS has extensive power to collect taxes. It is able to seize nearly everything that people own in order to recover back taxes. In addition, the IRS can file tax liens which can severely damage a Nevada taxpayer’s credit. It may also block the taxpayer from being able to make purchases, such as a home. Seeking a settlement with the IRS to pay back taxes in installments is often the best way to keep assets and credit intact.
Anyone seeking to pay their taxes in installments must first be sure that they have filed all of their tax returns. After that is done, the taxpayer will typically receive notices from the IRS indicating how much they owe in taxes, interest, and penalties. To set up an installment agreement to pay back taxes, the taxpayer is required to fill out Form 433. With this form, the IRS should have all of the information it needs to seize assets and garnish wages should the taxpayer fail to comply with the settlement.
Form 433 does give the taxpayer a place to list the trustee of a 401K. In some cases, it may be best to let the IRS seize the money in a 401K to protect other assets and settle a debt. However, taxpayers pursuing this course should have the IRS seize the money instead of pulling the funds out prematurely and then remitting it to the IRS. This is because 401K funds that are withdrawn before retirement age are subject to a 10% tax.
The IRS may resist taking the money from the 401K. A Nevada taxpayer trying to settle back taxes with the IRS may find it worthwhile to get a professional involved to see if they can work with the IRS on their behalf.
Source: Times-Standard Online, “IRS tax problems and your 401(k),” Dean Alexander, Sept. 29, 2012