Filed under: Debt Resolution, IRS Debts, Tax Debt, Uncategorized
Did you get one of those notices by the IRS that says you owe money for 2005, 06, and 07 but you never even filed a return in the first place? You’d be surprised, you’re definitely not alone. Lots of those notices have gone out lately. If you’ve got several years of back taxes that need to be filed, I recommend hiring a professional to do it for you. (Okay, namely I think you should hire me, but then again this is my website.)
But seriously, there’s a reason you didn’t file your taxes in the first place; maybe they were too complicated, maybe you were going through a divorce or suffering from a death in the family, or maybe you were just being lazy. Whatever the reason, the problem has gotten to the point where the IRS is threatening you– so you need to get yourself a buffer zone. Someone to put a little distance between you and the IRS, it keeps it a little less personal. Plus a professional will know all those funky little tax law changes: 2007 was the telephone tax credit, 2008 had that $300 recovery rebate credit you missed because you didn’t file, and stuff like that. You don’t want to lose out on those things.
If you hire a tax professional that’s worth her salt, the first thing she’s going to do is to contact the IRS and get all of the information they have on you. That will include your wage and income transcripts, your account transcripts, and any return transcripts they may have. Even though you didn’t file tax returns, the IRS filed one for you, that’s how they came up with what they’re assessing you for. It’s a waste of time trying to negotiate with the IRS if you don’t know what information they’re using. Remember, when the IRS files for you, it’s always the worst possible tax status and you get no deductions.
The next step is to prepare all of your income tax returns. Not just for 2005, 06, and 07—in order to be in compliance (that’s the term the IRS uses for someone who’s in good graces with the IRS) you must have all of your tax returns filed and up to date. You can’t set up a payment agreement to get yourself out of an IRS levy if you haven’t filed all of your returns.
If you’ve been a good doobie and responded to the first IRS notice immediately, they’ll give you 30 days to file and then you can usually get another 30 day extension before you have to deal with any consequences. If you’ve blown off the IRS a couple of times already, they will not be so willing to wait for you. The problem is that you might not know that you’ve blown them off, especially if you’ve moved and they have the wrong address for you. Don’t assume you’ve got 30 or 60 days unless the IRS tells you they’re giving you that much time.
Each tax return must be mailed in a separate envelope. People mess that up all the time. Older returns go to one address, current returns go to another. And the addresses vary depending upon where you live. (Another reason it’s a good idea to get professional help.) Even if you’re sending two or three returns to the same address, you still need to put them in separate envelopes. (Think of a little kid going through a box of cereal looking for the prize. Once the prize is found, he sort of forgets about the cereal. It’s the same with tax returns and envelopes. Once an IRS agent opens the envelope and finds a tax return—everything else is forgotten, that other return does not exist, only the first one he finds is real.)
Once you figure out what your real tax liability is (remember there will be penalties for late fling, late payment, plus interest), then you can negotiate a payment agreement or perhaps an offer-in-compromise if you qualify. It all depends upon how much you owe and what you’re able to pay. A simple payment agreement can be negotiated in about 10-15 minutes, while an offer-in-compromise can take 6 months or even longer.
On the “fun” scale, filing back taxes is right up there with root canals and colonoscopies. Nobody wants to do it, but you reach a certain point and you just have to. And, not unlike a colonoscopy or root canal, you want someone you trust doing the work. If you’re in the “back tax” situation, the sooner you just get it done, the better off you are. On the bright side, you’ll feel better when it’s all over.
The deadline is coming up, you’ve done your tax return and you’ve got a balance due. Problem is: you don’t have the cash to pay. What can you do?
First, if you can’t pay the whole thing, pay as much as you can now. The more you pay towards your tax, the less you’ll have to pay in interest and penalties. Let’s say you owe $5000, you don’t have that much but you can scrape together $2000, mail in a check for the $2000. Then you’re only dealing with interest and penalties on $3000 instead of $5000. I find that paying something also helps you when you have to deal with the IRS. They open their file and see that you paid something towards your account, it gives you credibility.
In a few weeks, you’ll get a letter from the IRS telling you that you owe them money. When you get the letter, call the number on the letter and talk to the IRS. (Use your good respectful voice that your mother taught you, I’m very serious about that. If you curse at them or threaten them, it will go into your record. It makes it much harder for me to save you after you’ve done that.) When you talk to the IRS, these are going to be your options:
- You may qualify to take up to 120 additional days to pay with no extra fee. They will still charge interest. If it’s possible for you to come up with the cash within 4 months, this is your best option.
- If you know that you won’t be able to pay off the debt within 120 days, you can apply for an installment agreement. You pay a fee of $105 and set up a monthly payment schedule. Generally, they like to set up a plan that has you pay off the money within two years. You can make arrangements to pay the amount over 5 years. Using that $5000 figure, if you pay it over 5 years it would be 5000 divided by 60 months = $83.33. They will round it up to $85. The problem with that is the interest will continue to accrue each month. If you can pay it off faster, do so.
You can apply for an installment agreement yourself online. Go to the IRS website : http://www.irs.gov/individuals/article/0,,id=149373,00.html
What about those ads I see for about settling your tax debt for “pennies on the dollar?” Generally, those ads refer to something known as an offer in compromise. Generally, the IRS will not accept an offer if it believes that you are capable of paying your debt. For example, I once received a phone call from a fellow who said that he owed $20,000 in tax debt and he wanted me to prepare an offer in compromise for him. I started asking some questions and found out that he made $200,000 a year, had substantial cash assets, and plenty of equity in his home. I asked him why he didn’t just pay the tax, he told me “He didn’t want to.” You have to be a good candidate for an offer in compromise before any reputable firm will make one for you. That fellow would never qualify for an offer in compromise, the best he’d get is a monthly payment agreement and he could do that himself for free.
If you are truly in a situation where you cannot pay your tax debt, please get professional assistance. Even if you don’t qualify for an offer in compromise, you may qualify for a reduced payment schedule until your situation improves. Be sure to ask your accountant, “Do you handle debt resolution issues?” Your corner tax store preparer is not trained to prepare the forms for an offer in compromise, and many CPAs don’t want to handle those issues. Look for the phrase “debt resolution” when hiring this type of assistance. Roberg Tax Solutions does debt resolution. (Just thought I should make that point!)
So you’ve done your taxes and now you’ve got a huge balance due. You have two problems—one is figuring out how to pay now, and the other is how to not owe next year. Today we’re looking at how not to owe next year. I recently did a post about changing your withholding, today I’m looking at making estimated tax payments.
If you’re self employed or have a lot of investment income, you might need to make quarterly estimated tax payments so that you don’t get hit with a huge tax debt and underpayment penalties. Generally, if you expect to owe over $1,000 in income taxes when you file your return, you should be filing estimated tax payments. (Note: if you can make up the difference by withholding the tax from your paycheck, you can do it that way.)
Estimated tax payments are paid four times a year: April 15 (the 18th this year), June 15th, September 15th, and January 15th of next year. Note that the dates seem a little funky, that’s why I listed them.
You make estimated tax payments with form 1040ES. Here’s a link to the forms on the IRS website: http://www.irs.gov/pub/irs-pdf/f1040es.pdf.
Some people find that their income is pretty stable and it’s easy to figure what the estimated tax payment should be. Just figure how much you’re going to owe and divide by four. Nice and easy. Unfortunately, it’s not always that easy for everyone. Maybe you own a business and your income is very sporadic, or you had a situation where you sold some stocks and made an uncharacteristically high capital gain. If you have a situation where your income is higher than normal, you can always adjust your estimated tax payment to cover the situation. If you feel the need to make an extra payment, you can just use a blank 1040ES from. (Seriously, do you think the IRS would say “no” to you making an extra estimated tax payment?)
Most people who owe federal estimated tax payments also need to make state estimated payments as well. Here’s a link to the IRS page with the state links: http://www.irs.gov/businesses/small/article/0,,id=99021,00.html
Here’s a little tax tip about your state estimated tax payments: your fourth annual payment isn’t due until January 15th, but if you pay on or before December 31st, you may include that state tax payment as a deduction on the Schedule A of your federal return. If you have to pay Alternative Minimum Tax (AMT) then it won’t help you, but if you don’t pay AMT you might like having that extra deduction.
You’ve done your taxes and now you’ve got a huge balance due. You have two problems—one is figuring out how to pay now, and the other is how to not owe next year. Today we’re looking at how not to owe next year.
If you have a regular job where your employer withholds your state and federal income taxes (plus your social security and medicare) then your problem is that you just didn’t withhold enough from your paycheck. The most common problem is claiming more exemptions than you’re entitled to. If you’re single with no house, no kids, etc, you should be claiming single with one exemption. I’m amazed at how often people come to me because they don’t understand why they owe, but they’ve claimed 10 exemptions when they have no deductions whatsoever.
Let’s say you’ve got the spouse, kids and mortgage—once again, you probably still claimed too many exemptions. I find that people overdo it on the personal allowances worksheet. If you’re married and filing “jointly”, then don’t put a one in the “head of household” box. If your income doesn’t fall within the right parameters, don’t claim that extra exemption for the child tax credit. When I’m examining these forms, I often find that couples checked boxes that they should have left blank.
Most importantly with married couples, if one spouse is the main wage earner that spouse should claim the exemptions and the spouse with the lower income should claim 0 exemptions. That should put you back on track.
People with multiple jobs are in the most danger of not withholding enough. Let’s say you’ve got two part-time jobs instead of one full time job. Individually, if one of those jobs was your only income, your tax rate would be fairly low, maybe the 10 to 15% tax bracket. But combined, your jobs put you in the 25% or more tax bracket. Even if you set your withholding rate at single with 0 exemptions, you wouldn’t have withheld enough. If that’s your situation, you’ll need to have extra withheld from our wages.
The best way to figure out how much to withhold is to use the IRS withholding calculator. Grab your latest pay stubs and your recent tax return and go to this website: http://www.irs.gov/individuals/page/0,,id=14806,00.html It’s the best way to figure out how much you really need to withhold to have a zero balance due. If you want a refund next year, you’ll need to claim less exemptions (or withhold more from your paycheck) than this site recommends.
My next post will be about how to figure an estimated tax payment.