Category Archives: Tax Tips

What if you can’t pay your taxes?

Posted on by
Reply
 By Amy Feldman | Reuters – 16 hours ago
 

NEW YORK (Reuters) – It’s one of the worst tax time scenarios: You discover while doing your taxes — or you just know without even doing them —that you owe taxes, and you don’t have the cash. What should you do?

You may be tempted to ignore the problem. Don’t do it. The worst thing you can do is put off filing your return because you’re afraid of the bill. The Internal Revenue Service (IRS) penalties for not filing are more punitive than the ones for not paying.

The failure-to-file penalty runs to 5.0 percent a month that your return is late, up to 25 percent, with a minimum penalty of $135. The failure-to-pay penalty is just a fraction of that, at 0.5 percent a month of the unpaid tax at April 17, and even that is cut in half for taxpayers who set up a formal installment plan with the IRS. Either way, you’ll also owe interest, currently at a modest 3.0 percent a year.

Consider the case of a taxpayer who owes $2,000 and won’t have the money until the end of June. If she files a return or an extension by April 17, the total penalties and interest due would be just $43, according to an analysis run by The Tax Institute at H&R Block for Thomson Reuters.

But if she puts off filing until June 30, and pays then, those penalties and interest would multiply to $314, said H&R Block. The longer this taxpayer waits to file, the more those fees would balloon.

“That’s a lot of money for late filing,” says Allison Shipley, a partner at PricewaterhouseCoopers in Miami. “And, in my experience with clients who have had a difference with the IRS, they tend to be more lenient if you’ve always filed your returns on time.”

So the first step to consider if you’re not ready to file is the simplest: File for a six-month extension, using Form 4868. As long as you’ve paid 90 percent of the taxes you owe by April 17, you will not owe the late-filing penalty. You will, however, still owe interest on any unpaid taxes.

If you have the cash, but have run out of time to deal with the paperwork, you can send in an estimated amount to avoid some or all of that interest. Similarly, if you owe taxes, but can’t pay all that you owe, you could send in a partial payment to cut the interest and penalties due.

HARDSHIP BREAKS

The IRS does offer a few hardship breaks for cash-poor filers. The big one in effect this year is called Fresh Start, and lets those who were unemployed request a six-month extension to pay this year’s tax bill without being charged any penalties.

You would qualify if you did not have a job for 30 straight days in 2011 or in 2012 until April 17, or if you were self-employed and saw your income drop by at least 25 percent in 2011 due to the economy. You would file Form 1127, and automatically get until October 15 to pay. While you would get out of the penalties for six months, you would still owe interest.

Those who have survived a natural disaster or who are on active military duty may also qualify for penalty-free extensions for varying amounts of time.

FINDING THE CASH

If you are not in one of these special categories, and you owe more than you have, you may want to weigh your various options for finding the money you need. You could: (1) put your tax bill on your credit card; (2)Use a home-equity line of credit; (3)just pay late and swallow the penalties and interest; or (4)ask the IRS to accept a formal installment agreement.

While the standard advice is to pay the IRS first, that may not make sense this year. IRS rates are so low, compared to credit card rates, that it may make more sense to deal with the tax agency directly. A tax installment payment plan, even with penalties, costs around 6.0 percent a year.

“This is an interesting time for strategy because of those low rates,” says Larry McKoy, a certified public accountant at Dickson Hughes Goodman in Glen Allen, Virginia.

Not only is the average rate on credit cards currently 15 percent, according to CreditCard.com, but when you pay taxes on a credit card you also have to pay an added “convenience fee” that could add as much as 2.0 percent to your transaction. That’s because the IRS is prohibited from paying the interchange fees most retailers pay on card transactions.

If you have access to a home equity line of credit, it may be worth tapping that because the rate is likely lower and you do not have to worry about those taxes hanging over your head, says Gregg Wind, a certified public account with Wind & Stern in Los Angeles.

INSTALLMENT PLAN COMPLEXITITES

There’s no hard-and-fast rule for when to do an installment plan, but the higher the amount you owe and the longer it will take you to pay it, the better off you are to request one rather than simply paying late. An installment plan will put your payments on a monthly schedule and cut your penalty on unpaid taxes in half, to 0.25 percent.

To set one up, you will file Form 9465 and pay an application fee of between $43 and $105, depending on your income level and whether you are willing to pay through automatic deductions from your checking account or paycheck.(The instructions to Form 9465 are available at the IRS website (http://www.irs.gov/pub/irs-pdf/i9465.pdf)

The IRS can reject an installment agreement, but usually does not, unless filers owe an astronomical sum or request a overly lengthy payment period. In fact, acceptance is guaranteed if you owe less than $10,000, request a payment period of three years or less, you have paid all your taxes for the last five years and the “the IRS determines that you cannot pay the tax owed in full when it is due,” according to the IRS’s rules on installment agreements.

For larger tax liabilities, the process gets more complex, though there is a streamlined application process for those who owe no more than $50,000. Taxpayers who owe larger amounts must file Form 9465-FS.

“If it’s under $50,000 you are not going to be asked to file a lot of financial information,” says Wind. “A lot of people are overwhelmed by the thought of compiling a lot of financial information, but they don’t need to be.”

Better to fill out a few extra forms than get stuck paying 5 percent a month, every month, for not filing them.

(The author is a Reuters contributor. The opinions expressed are his/her own.)

(Amy Feldman; Editing by Linda Stern)

Tax Day is April 17 this year

Posted on by
Reply

CNNMoney.comBy Blake Ellis | CNNMoney.com – 4 hours ago

Tax Day is drawing near, but you still have a little time left to get your return filed to Uncle Sam.

While the tax filing deadline typically falls on April 15, this year taxes are due Tuesday, April 17.

The extra break was granted because April 15 is a Sunday this year, and Monday is Emancipation Day, a holiday in Washington D.C. that celebrates the freeing of slaves in the district. Under the tax code, filing deadlines can’t fall on Saturdays, Sundays or holidays.

Last year, Tax Day was extended until April 18, also thanks to Emancipation Day.

The IRS said earlier this year that it expects to receive more than 144 million individual tax returns this season, with the majority projected to be submitted by the new April 17 deadline. As of the end of March, the IRS had already received 91 million returns and had doled out refunds to 75 million taxpayers — with refunds averaging $2,286.

If you still can’t get your taxes completed on time, you can always file for a six-month extension by submitting Form 4868. Or you can even do it on your smartphone by using Taxsoftware.com’s Form 4868 Extension app.

If you don’t owe any taxes, then you won’t be hit with late penalties for failing to file on time. Just be absolutely certain that you don’t owe the IRS money — if your calculations are wrong, the IRS will come after you. If you do end up owing taxes, the penalty for filing late is 5% of the amount owed for each month that you fail to file, up to a maximum of 25% (which would be reached after five months).

Also, when rushing to meet the tax deadline be careful about how fast you drive to the post office — or to the nearest tax preparer. Your odds of getting into a fatal car crash jump by 6% on tax filing day, according to a study published in the Journal of the American Medical Association.

Paying the tax piper with plastic

Posted on by
Reply

By Jenny C. McCune• Bankrate.com

When it comes to taking a cruise, your spending doesn’t end when you’ve booked the trip. Lots of cruise-related expenses have the potential to bust your budget, from the flight to your embarkation point to drinks on the cruise to shore excursions. So-called add-on expenses can equal or exceed the cost of your cruise if you’re not careful.

“The trend is for some cruise lines to offer relatively low prices to get people on the ship and then hit them with cash fees for little expenses here and there that after a week can really add up,” says Eileen Entin, owner of Diamond Cruise and Travel in Hightstown, N.J.

Payers of federal quarterly estimated taxes now can charge those four extra amounts throughout the year, not just in April. Then there are the state taxes that can be put on plastic, too.

Why? The process is relatively simple. First, decide which card has room for your tax debt. Then visit either company’s Web site or call its toll-free number. Five or six steps later, your payment is made.

In addition to these two services, most tax software programs allow you to pay electronically, and that includes by credit card. The convenience fee is still charged in these cases, but it goes to the software vendor, who then transmits it to the card processor. The software companies don’t charge extra for e-filers who say “charge it.”

Taxes: just another purchase
Another factor boosting tax charges: Americans view these transactions as just another purchase.

Taxpayers pay the IRS by credit card for the same reasons they regularly pay with plastic. It’s convenient, it allows them to put off paying a bill for a month, and, in many instances, it’s a way to rack up frequent-flier miles or other bonus points.

Jordan Goodman, author of “Everyone’s Money Book,” once paid a $28,000 tax bill with his American Express card. In the process, he accrued a lot of membership award points.

But, says Goodman, using credit cards to pay Uncle Sam isn’t right for everyone. You have to balance the convenience fee you’re charged when you make your tax payment. Will the amount of frequent-flier miles outweigh that fee?

“You have to do your arithmetic before committing to this,” agrees Donna LeValley, a tax attorney who has served as contributing editor of the popular J.K. Lasser “Your Income Tax Guide” series.

Increasing interest
For the credit card option to make sense, a taxpayer also must pay the credit card company promptly to avoid account interest.

Some credit cards that offer frequent-flier miles or other bonuses also charge a higher interest rate, so you could end up paying thousands of dollars in interest if you elect to pay only the minimum due each month. Bankrate.com tracks the most current annual percentage rates for air-mile cards.

You’re not off the hook either if you have a low-interest rate card or you shift your balance over to one. That’s because the credit card companies will quickly charge you the usual higher market rate even if you are one day late, Goodman says.

If you must pay taxes by credit, call your credit card company and ask them to issue a check to pay the IRS, your state, or both advises Eva Rosenberg, the Web’s Tax Mama. That way, you won’t pay the convenience fee, but will earn your frequent-flier miles or bonus points.

This method also is available through use of convenience checks that many card issuers periodically include in billing statements. However, these checks generally come with their own fees. And while many cards offer low introductory rates to encourage use of the checks, the ultimate interest could end up higher than what’s charged for regular plastic purchases. Interest rate information may not be listed on the check; check your card holder agreement or call the issuer.

These costs could, depending on what you owe Uncle Sam, match or outpace what you would have paid by simply charging your tax bill.

Other payment plans
Thinking twice about pulling out the plastic to pay your tax bill? There are other options for people who don’t have the cash on hand:

  • Work out an installment agreement with the IRS. According to Edward Kaplan, an attorney with Green Radovsky Malone & Share in San Francisco, the IRS interest rate on tax deficiencies generally is much less than that charged by your usual credit card issuer. The IRS adjusts its rates quarterly based on the federal short-term rate, meaning interest for underpayments will stay at 5 percent for the quarter starting April 1.
  • Get a personal loan from your bank or a credit union.
  • Establish and draw on a home equity line. Interest here may be deductible on next year’s tax return.
  • Avoid credit card vendor fees by using the Electronic Federal Tax Payment System. Businesses have been using EFTPS for years to directly transfer various taxes to the IRS. Now the agency is encouraging individuals to use the system for annual returns and estimated tax payments. Of course, this method requires you have the funds in your account to pay the IRS. You also need to enroll and get a PIN number, so don’t wait until the last minute. And check with your bank to see if it charges a transfer fee.

Again, each of these payment methods involves costs in addition to your tax bill. Only you can be sure whether one of these options, or paying with plastic, makes sense come April 15.

If you can pay the bill off within the grace period and the fees don’t outweigh the convenience and card perks, it could be the right move for you. But if you’re paying by credit card out of desperation because you don’t have the cash on hand, explore other payment avenues first.

One thing is clear regardless of which payment vehicle you choose. They all go down the same road to the ultimate destination: the tax collector.

Jenny C. McCune is a contributing editor based in Montana.

Facts About IRS Payment Plans

Posted on by
Reply
When you fall behind on your income tax payments, the IRS may let you set up a payment plan, called an installment agreement, to get you back on track. It is up to you, however, to take that first step and make a request for the installment agreement, which you can do by filing Form 9465. You can file the form with your tax return, online, or even over the phone, in some cases. But before you make the request, you’ll want to gather some facts about IRS payment plans.
10-year collection period

By law, the IRS has only 10 years from the date your income tax is assessed to collect it from you. For example, if you reported an outstanding tax bill on your 2010 tax return on April 15, 2011, in most cases the IRS has until April 15, 2021 to collect the tax from you. Therefore, the IRS will require monthly payment amounts that are large enough to pay off the entire tax bill by the end of the 10-year period. If you ignore your tax bill entirely, the IRS can secure collection of the tax you owe through wage garnishments or by placing liens on your personal property.

Guaranteed acceptance of your installment agreement

If your outstanding tax balance is $10,000 or less at the time you request an installment agreement, IRS acceptance of your proposed payment plan may be guaranteed if a number of requirements are met.

In order to qualify, in the prior five tax years, you must have filed all income tax returns on time, paid the income tax due, and not requested an installment agreement. Moreover, the IRS must conclude from the information you provide that you are unable to pay the tax in full. You must also agree to comply with all tax laws for the duration of the installment agreement and you must agree to pay your tax debt within three years.

Fee for Installment Agreement

The IRS does charge a user fee for setting up or reinstating an installment agreement.

Interest and penalties will still apply

Entering into an installment agreement can provide you with peace of mind that the IRS will not pursue any of the harshest collection methods at its disposal, but interest and penalty charges will continue to accrue on your unpaid tax balances. This is because the payment of your outstanding tax balance is still late even though you are making attempts to repay the bill through a monthly payment plan. Because of the penalty and interest charges, it’s important to pay as much as possible each month; otherwise, it will take you longer to pay off the debt in full.

If you owe more than $50,000 in taxes

If the amount of tax you owe at the time you request an installment agreement exceeds $50,000, you’ll need to provide the IRS with additional information about your personal finances. In this situation, you must request the payment plan on Form 9465-FS and attach a Collection Information Statement on Form 433-F. The IRS will then perform a more thorough review of your assets and liabilities to determine whether you qualify for an installment agreement.

What If You Can’t Pay Your Taxes?

Posted on by
Reply

CCH Examines Options Taxpayers Need to Know

Press Release: CCH, a Wolters Kluwer business – 22 hours ago

 
 

RIVERWOODS, Ill., April 2, 2012 /PRNewswire/ — With the end of tax season just around the corner, millions may be cringing over income tax bills they simply can’t afford to pay. Ignoring payment is not an option, but there are alternatives that taxpayers facing this situation should know about, according to CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).

“If you can’t pay what you owe all at once, you should still file your tax return and make payment arrangements with the IRS,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “If you don’t file because you can’t pay, you’re immediately facing a failure-to-file penalty as well as interest, additional costs and potentially a tax lien or levy down the road.”

Last year, the IRS issued new rules to help soften the blow for taxpayers who can’t afford to pay their taxes when owed, including increasing the threshold at which the IRS files a tax lien, as well as expanding the installment and offers in compromise programs to allow more taxpayers to qualify. Despite the changes, however, taxpayers can still face a host of issues for not paying taxes when owed and need to understand the options available to address their tax debt. The IRS also followed-up this year with some expanded penalty relief.

Newly Expanded Fresh Start Initiative

To better help those who may be struggling to pay their taxes, the IRS has expanded its “Fresh Start” initiative. To take advantage of the initiative, taxpayers may fill out a new Form 1127A to request the 2011 penalty relief if they are in one of these two categories:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to this year’s April 17 tax deadline; or
  • Self-employed individuals who experienced a 25-percent or greater reduction in business income in 2011 due to the economy.

To qualify for this penalty relief, the taxpayer’s adjusted gross income must not exceed $200,000 if married filing jointly or $100,000 if filing status is single, married filing separately, head of household or qualifying widower. However, a taxpayer’s 2011 balance due can not exceed $50,000. The penalty relief only extends to October 15, 2012, and interest continues to accrue during that period.

Penalties for Ignoring Tax Deadlines  

If a taxpayer does not file a return and pay the taxes owed when due, the IRS can take several steps, including:

  • Failure-to-file penalty – The taxpayer faces a penalty of 5 percent of the tax due for every month or any fraction of a month that the return is overdue, capped at 25 percent;
  • Substitute tax return – The IRS can file a substitute tax return for the taxpayer based on information it has from other sources; and
  • Levies and liens – The IRS may start a collection process that can include a tax levy or tax lien against the taxpayer’s property, bank account or wages. Tax liens can impact credit ratings and make it difficult to buy and sell property and even get a job.

Three other options available to taxpayers include:

1. Borrow, liquidate assets or charge it. 

Taxpayers who owe and can’t pay their entire tax bill when it’s due, but can pay the full amount within 120 days, can ask the IRS for a short-term administrative extension.

Those who need more time have just a few options: They can try to secure a bank loan, such as a home equity loan, cash out a retirement account or use their credit card. 

While going into debt to pay off a debt may not seem the best option, the interest rate and fees assessed by a bank or credit card issuer may be lower than the interest and penalties assessed by the IRS. Credit card payments must be made electronically, through personal tax software, a paid tax preparer or through credit card service payment providers.

2. Enter into an installment agreement with the IRS. 

The IRS is required to accept installment payments if a taxpayer has a good filing and payment record over the past five years, the amount owed is not more than $10,000 and it can be paid off in full within three years. 

Small businesses may enter into “streamlined” installment agreements if their debt is below $25,000 and they agree to pay it off in 24 months. This option is available to small businesses that file as an individual or as a business.

3. Reach an offer in compromise with the IRS. 

In some instances, the IRS may accept less than the full amount due. This typically occurs if the taxpayer can show that the full tax debt could never be collected or they have a dispute with the IRS as to how much is owed, but neither party wants to enter into a legal battle to resolve the issue.

Under the new rules issued in February, more people may be eligible to participate in offers in compromise. Taxpayers with incomes of up to $100,000 (up from $50,000) and who have a tax debt below $50,000 (up from $25,000) can now request an offer in compromise from the IRS.