Nikki and her second husband, who live in the San Francisco Bay Area, are $300,000 in debt — and $120,000 of that is owed to the IRS. While they’ve set up a payment plan, the IRS has already sent notices for liens and levies.
After divorcing her first husband, Nikki suddenly had three kids to look after on her own. “I literally just put my head down and worked and worked and worked just to keep a roof over our head. I did not file taxes probably for about four years,” she told The Ramsey Show (1).
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She remarried in 2023 and is now working as a nurse. Together, they make a combined income of $350,000.
But aside from their tax debt, the couple owes about $100,000 in student loans and another $80,000 in credit card debt, though they’ve been paying that down since they got married. They pay $5,000 a month for their mortgage, which — as Ramsey points out — isn’t bad for their region.
“You guys are living a Bay lifestyle and you’re eating up your 300 grand and you’re not making much progress on this debt,” he said. “You’re broke. Act like it. And attack this debt with a vengeance.”
Here’s why Ramsey says it’s time to think of their $350K income as $50K instead.
What happens if you owe money to the IRS?
If you can’t pay your taxes by the filing due date, then you could end up paying interest on any balance you owe and a monthly late payment penalty. Plus, there’s an additional penalty for failing to file a tax return. So even if you can’t pay your balance in full, it still makes sense to file your return on time.
The IRS charges interest daily on unpaid balances; it also charges interest on penalties, and there are a lot of other penalties, too (2). So the longer you wait to pay your tax debt, the worse it gets. Penalties can reach up to 25% of the unpaid balance (3).
You may be able to set up a payment plan, if you qualify. Depending on your situation, you have two options: a short-term or a long-term payment plan.
If you can pay off your tax debt within 180 days and owe less than $100,000 in tax, penalties and interest combined, then you may be eligible for a short-term payment plan. If you need more time, a long-term payment plan could be an option — if you owe $50,000 or less and have filed all your tax returns. With a long-term payment plan, you pay off your tax debt in monthly installments for up to six years (4).
The failure-to-pay penalty is cut in half with a long-term payment plan — so 0.25% instead of 0.5% (5).
But once you owe more than $50,000 — and can’t pay it off in 180 days — that’s when things can get (even more) difficult. This can result in more aggressive collection efforts by the IRS, as well as potential liens, levies and garnishments (4).
For example, the IRS could place a tax lien against your property (6) or seize assets like vehicles or bank accounts to help pay off your unpaid tax debt (7). You could even lose your passport over “seriously delinquent” tax debt (8).
While a lien is no longer listed on your credit report (and therefore won’t affect your credit score), it could still hinder your ability to get new credit. That’s because tax liens are part of the public record, so lenders may consider you too risky (9).
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What can you do about it?
While you may be able to work out a payment plan, offer a compromise (if you can demonstrate financial hardship) or be granted an IRS penalty abatement (if you can demonstrate reasonable cause for not paying, such as a natural disaster), ultimately you still have to pay off that tax debt.
But if you owe more than $50,000, like Nikki and her husband, you typically have to meet stricter standards to qualify for a payment plan and make higher monthly payments (10).
That’s why Ramsey said Nikki and her husband will have to “buckle down and live on nothing.”
“You don’t make $350,000,” he said. “You make $50,000 and you need to pay off [$300,000] worth of debt.”
That means cutting out any non-essential expenses, such as dining out or taking vacations, and putting that money toward their tax debt. It could help to allocate that money to IRS payments in a formal monthly budget.
If they do this, they could be debt-free in about two years, Ramsey said— but they need to tackle their IRS debt before anything else.
“The penalties and the interest that they’re charging you are the worst on the planet,” said Ramsey. “And they have almost unlimited power to come and mess with your life … even though you’re on a payment plan.”
In addition to cutting back their expenses, they could also look for ways to increase their income to pay off their debt faster, such as selling assets (like a second car), renting out a room in their house or taking on a side hustle.
From there, Ramsey said they could use the snowball method to pay off their remaining debt. The snowball method works by paying off debts from smallest to largest balances. You pay off the smallest debt first, while making minimum payments on the others. Once the smallest debt is paid off, you move onto the next, and so on (11).
In this couple’s case, however, they may want to take the avalanche approach with the remainder of their debt — again, after they fully pay off their tax debt. With this method, you pay off the debt with the highest interest rate first, while making minimum payments on all other debts. Once that’s paid off, you start paying off the debt with the next-highest interest rate (12).
Nikki and her husband are paying off a combination of credit card and student loan debt, but it’s likely their credit cards have a much higher interest rate, so they may want to tackle that first — even though they owe more in student loan debt at this point.
They should also look into whether Nikki qualifies for loan repayment programs for health care workers in her state (13).
The average credit card interest rate in October was 24.19%, according to LendingTree (14).
“On the other side of this, with nothing but a house payment, making $350,000, you’re going to finally feel that peace you’ve been craving for so many years,” co-host John Delony told Nikki. “But there’s no other way than through this thing.”
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Ramsey Show Highlights (1); IRS (2); IRS (3); IRS (4); Intuit (5); IRS (6); IRS (7); IRS (8); Experian (9); Rush Tax Resolution (10); Ramsey Solutions (11); Ramsey Solutions (12); California Department of Health Care Access and Information (13); LendingTree (14)
This article originally appeared on Moneywise.com under the title: Why Dave Ramsey says it’s time for San Francisco couple who owe the IRS $120K to think of their $350K income as $50K
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