When a Check to the IRS Bounces
QUESTION: To my horror, I recently got a statement from my bank informing me that my check to the IRS for last year’s taxes bounced. The bank charged me a fee and didn’t send the check back through, so I immediately put another check in the mail. I had filed for an extension, so I’m not worried about the time element--but I’m very concerned about what the IRS can do to me. Do you think they’ll ignore this as long as they get their money quickly?--O. H.
ANSWER: Don’t count on the IRS overlooking the bounced check. It’s a safe bet you’ll be hearing from the agency. But since you quickly put another check in the mail to cover the bad one, the agency may well decide that your intent was good and let you off without a fine.
According to the agency’s own records, more than 30,000 of the estimated 814,000 taxpayers who sent the IRS bad checks in the first six months of last year--more recent data isn’t available--escaped without a penalty after successfully arguing that they thought their checks were good. (Those who sent another check after the filing deadline were charged interest, however.)
But let’s say you are penalized. Even then, there isn’t much to fear. If your check was for less than $500, the maximum fine would be a measly $5. Specifically, you would be subject to a fine equal to the amount of the bounced check or $5--whichever is less.
Even for checks exceeding $500, the fine is minimal--the equivalent of 1% of the amount of the check.
The IRS penalty for bad checks hasn’t changed for 33 years. And the IRS has twice been rebuffed by Congress in its efforts to raise the fine.
Q: I’ve always found it hard enough keeping track of the differences between a condominium and a cooperative. But I swear I overheard somebody the other day talking about a “condop.” What on earth is that?--J. B.
A: A so-called condop looks like any other residential building with commercial stores on the lower levels. It’s only the legal structure that is different.
This hybrid of a condominium and a cooperative was devised to help some co-op owners overcome income tax requirements that they couldn’t meet. Specifically, residential co-op owners generally may deduct the interest expenses and real estate taxes contained in their monthly maintenance payments.
The deduction is denied, however, if more than 20% of the cooperative’s gross income comes from sources other than the maintenance fees, rents and other costs of ownership provided by the building’s residential owners. The most common outside income source in such buildings is the co-op’s share of sales generated by commercial establishments located on the lower floors.
When the commercial space in some residential buildings around the country started generating more than 20% of the entire building’s income--and thus, the owners lost their tax deductions--the condop concept was born.
Here’s how it works: The commercial stores in the building are converted into separate condominium units and all of the residential units are combined into a single condominium unit. Then, the cooperative assumes ownership of the residential condo--but not of the commercial condos--and sells off co-op units. In this way, all of the co-op’s income is derived from residents, all of whom are assured a way of sidestepping the tax question.
By the way, the main difference between a condominium and a cooperative is that condo buyers own a specific unit in the building and a share of such communally used areas as the lobby, basement and pool. In contrast, the cooperative owner doesn’t actually own the apartment he occupies. Rather, he owns a share of the entire building and holds an open-end lease on the apartment he occupies.
Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Los Angeles Times, 780 Third Ave., Suite 3801, New York, N.Y. 10017.
