Paying off Back Taxes
South of the border, one of the most beloved country singers in the U.S. is Willie Nelson. Now almost 82 years old, the legend has recorded more than 60 albums in the studio, 10 more as a live performer, 37 compilation albums, two soundtracks for films and 27 collaborations. However, one of the most notorious was the album “Who’ll Buy My Memories? (The I.R.S. Tapes).” The I.R.S. is the Internal Revenue Service, which is the agency in the American government charged with collecting taxes. This album was made as part of a unique tax settlement that Nelson made to pay his tax debt down. This is the album that ended up saving Nelson’s career.
How did Nelson end up in this situation? Well, he went years without paying the right amount of income taxes. After a lengthy I.R.S. investigation, his debt was calculated at $16.7 million. Nelson’s lawyer went in and negotiated that debt down to $6 million. However, Nelson didn’t have $6 million lying around, so he didn’t pay the I.R.S. One thing that governments have in common is that they love their tax revenue, and so the agency raided Nelson’s property. On November 9, 1990, agents took all of his property except his favorite guitar, Trigger, which he had given to his daughter ahead of time, thinking a raid might be imminent. However, his ranch in rural Texas, his recording studio, twenty pieces of real estate in four different states, memorabilia, recordings and instruments. While friends and family helped him out, putting together fundraisers to buy his home and other property back for him, this was still an event that rocked the public consciousness.
So how did Nelson get in so much trouble? The I.R.S. started looking at Nelson’s tax returns starting in 1984, and they disallowed a deduction he had been taking for tax shelter investments. To be fair, his former accountants, Price Waterhouse, had told him to take the deduction, but by the time the I.R.S. found everything out, Nelson owed $6 million in debt and $10 million in underpayment penalties and interest. He did sue Price Waterhouse for $45 million and received an undisclosed settlement.
After the fans had bought Nelson’s stuff back, he still owed a lot. But the compromise was that Nelson would release a new album and share the profits with the I.R.S. Between those proceeds and the money Nelson made from suing Price Waterhouse, Nelson was able to pay off his debts. Now, in 2015, he is as successful as he has ever been.
So how does this relate to you? The bottom line is that if you have back taxes, Ottawa knows about it. If they don’t know about it, they will soon. Whether they’re your personal income taxes or corporate taxes in which you have a personal obligation, the Canada Revenue Agency will be coming for you — if they haven’t already started. So if you know that a back tax bill is looming, there are some proactive steps that you can take — and they involve your house.
Let’s say that you’ve been paying your mortgage faithfully for a number of years now. It’s likely that you’ve built up a good amount of equity. So why not use that money that’s tied up in your house? Taking out a home equity loan or home equity line of credit to pay those back taxes now, while the underpayment fees and interest expenses are a lot lower, makes a lot more sense than waiting for those penalties to build. The CRA can start garnishing your wages, apply liens and even start taking away some of your assets in order to satisfy the debt. Wouldn’t you rather use the equity in your home to pay those tax debts than have your house seized and sold to pay them?
When it comes to satisfying back tax bills, proactivity is the key. Taking steps now to find out the exact amount of the debt and work toward a negotiated settlement will give you a more favorable profile with the CRA, because there are a lot of people who will simply hope the government doesn’t notice the problem. If you haven’t noticed, governments know how to spend money — which means they know how to track down the money they’re supposed to be receiving. Talk to an equity loan specialist at Amansad Financial today to find out how this can benefit you.