Brenda Walker knew that by cashing in her retirement fund, she would need to pay taxes on the withdrawal. But with her godmother having just died without enough money to pay for a funeral, and family members in dire financial straits, she figured she would worry about the tax penalty later and deal with the immediate problems first. Though she had recently quit her job with the California Department of Corrections, she had never been out of work involuntarily and planned to return soon.
So in 2006, she took out the $80,000 in her 401(k) retirement account, paid her godmother’s funeral expenses, and gave the rest to her family members in need. Little did she know that she would be struggling to pay taxes on her withdrawal for the next 10 years, a debt that would push her down the income ladder from among the solidly working class to homeless.
It’s an axiom that the only things certain in life are death and taxes. Though many working poor pay no income tax, their income is nevertheless subject to payroll taxes of 7.65 percent, for Social Security and Medicare. While many low-income workers can take advantage of the earned income tax credit, most of the benefits go to families with children. A childless adult working full-time in 2015 for the federal minimum wage (a salary of $14,500) will pay $1,506 in federal taxes, and adults earning the minimum wage are not eligible for any tax credits. The Center on Budget and Policy Priorities, a left-leaning research institution, calculates that while the EITC can help families eke above the poverty line by allowing them to deduct money for each child in their household, a 2016 report notes that “low-wage workers not raising children are the sole group that the federal tax system taxes into or deeper into poverty.”
And that’s if you stay up-to-date. Even common situations, such as getting a mortgage in a family member’s name or moving in with a mother-in-law because of job loss—or a mistake or a miscalculation, like Walker made—can place a taxpayer in arrears with the Internal Revenue Service. In fiscal year 2015, the IRS collected assessed $14.5 billion in additional taxes on late returns, bringing in more than $2.2 billion. Caroline Chen, an assistant clinical professor at Santa Clara University School of Law in San Jose and the director of the school’s Low Income Tax Clinic, explained that low-income taxpayers often face problems with their taxes because of unconventional living situations, such as many people at a single address or grandparents with dependent children. “It’s a lot of issues you just don’t think about,” she said. Owing back taxes can limit a person’s ability to save, destroy a credit record, and cause the IRS to garnish wages or disability benefits. It’s an additional hurdle to climbing out of the canyon of poverty. “People can get into a really difficult time trying to pay that back,” Chen said.
Middle aged and sturdy, with a kind face that wrinkles when she is worried, Walker started her career as a correctional officer in 1986. First at the California Men’s Colony in San Luis Obispo and later at San Quentin State Prison in Marin County, she worked her way up to correctional sergeant. In 2006, the years of demanding work caught up to her, and she quit her job following a conflict. “The job is very stressful,” she said. Then her godmother died. She decided to take some time off work, moving in with a friend while she got her bearings.
When the tax bills came about a year later, she couldn’t believe the penalties were so stiff: Walker owed $21,000 to the state of California and $35,000 to the IRS, including penalties. Flummoxed, Walker contacted the IRS, which helped her figure out how much she could pay each month based on her earnings and living expenses: $25. “They understand,” she said. A payment plan was set up, and Walker diligently tried to follow it as she got the rest of her life back on track. “It just didn’t work out the way I planned. I just didn’t get to work fast enough.”
When she got a job, in private security, her pay was just $14.25. Because rents in the Bay Area are among the highest in the nation, she could still only afford to send the IRS $25 a month after housing—she was paying her friend $350 a month for the room—and food. At the end of the month, she said, “you don’t have nothing left.” Even sticking to the payment schedule, she could never retire the debt during her lifetime.
After a while, Walker needed to find her own place. With no savings with which to place a security deposit, she landed at the Bay Area Rescue Mission, a homeless shelter in Richmond.
In 2015, Walker learned through a social worker that her income qualified her for the federal subsidized housing program known as Section 8. After applying, she was informed that she wouldn’t be eligible to rent any Section 8 housing because of a tax lien the IRS had imposed on her. A federal tax lien can effectively make it impossible to qualify for a loan or pass a credit check to rent an apartment; 535,580 were filed in 2014 and another 515,247 in 2015. The lien is statutory and is automatically placed when the IRS determines a taxpayer hasn’t paid what it says she owes. Though Walker had been making her payments, she said, the IRS told her she had changed her address and failed to notify it. (According to the IRS website, liens are only placed for failure to pay; a spokesperson said the IRS does not comment on individual cases.) Even though Walker qualified for Section 8 on every other point, the lien ruined her credit score. The housing authority advised her to get rid of the lien, but that was a nonstarter. “If I could get rid of the lien, I wouldn’t need affordable housing,” she said.
In October 2015 Walker attended a debtors’ clinic in Richmond organized by Bay Area Legal Aid. She wore her security uniform, ready to go to work afterward, and carried all her personal items in a large black backpack—it was unsafe to leave anything at the shelter. Navigating the IRS website with the help of a volunteer law student, she discovered she was eligible to make a deal with the IRS that would reduce her debt by more than 90 percent.
In 2011, the IRS’ then commissioner, Douglas H. Shulman, launched the “Fresh Start” program, which allows taxpayers who owe back taxes to pay less—often far less—than the amount owed through an “offer in compromise.” It also enables people like Walker who are paying their back taxes through monthly installments to request the removal of their tax lien. Because the program reduces the qualifications for eligibility and includes the consideration of living expenses and other financial obligations, after its establishment the IRS nearly doubled the rate of approved requests for an offer in compromise to 42 percent in 2013, according to data provided by the IRS. In fiscal 2015, taxpayers proposed around 67,000 offers in compromise to settle existing tax liabilities for less than the full amount owed. IRS accepted about 27,000, collecting $204.7 million. Once an offer is accepted, the taxpayer has a set period of time, usually one year, to pay the agreed-on amount, or the offer is voided and the tax burden returns.
Completing the forms on the website, Walker realized she could pay off her entire debt to the IRS with a single payment of $3,000. But she didn’t have $3,000; she barely had $30. “It’s like I can’t get rid of it,” she said as tears rolled down her face. With the savings rate for the bottom 90 percent of income earners in the U.S. at around 2 percent annually, it’s easy to see how many people share Walker’s frustration at not having enough assets to meet an offer in compromise.
Private debt consolidation businesses advertise that they will help people get out of their tax debt. Walker received solicitations from Global Client Solutions, which collects hefty fees to help people settle their debts with the IRS. Chen said that these scams are a huge problem: “I get really incensed by these programs that prey upon taxpayers.” Some of her clients have paid hundreds of dollars to companies that have done nothing to settle tax debt. Fresh Start was begun in response to the impression that many such services don’t have the taxpayers’ best interests in mind. It costs $120 to apply to Fresh Start, an amount that goes toward the debt once an arrangement is agreed to. Many private companies charge more and are less up front about the costs.
The IRS agreed to remove the tax lien to allow Walker to improve her credit. “They worked with me really well,” she said. She now works at the Red Cross in Oakland as a security guard. She normally works a 40-hour week, though lately she has been putting in 12-hour days. She rents a room in San Pablo, an hour away by bus, for $700 a month. She’s still paying the $25, and by working longer shifts she usually has about $100 at the end of the month, part of which also goes to her debt to the IRS. The federal government will keep her income tax refund, if she gets one.
Walker hasn’t paid the $3,000 to settle the offer in compromise; she wants to save up enough to pay down at least half at once. Walker plans to use a credit card to make the payment. There will still be the $21,000 she owes California, but she hopes the state will make her a similar offer through its offer-in-compromise program.
Walker is also taking classes online, aiming to earn her B.S. in criminal justice from Walden University, a for-profit college. She plans to go on and get a master’s in emergency management so she can help people in their times of need. “It’s what I’ve always done,” she said. “Everything is starting to look good. Great, actually.” She figures that by the time she gets her bachelor’s degree, she will owe about $32,000 on college loans.