Foolish Tax Payment Decisions May Cost You
Most Americans will end the tax season with a fat refund from the IRS and a sense of relief that they won’t have to wrestle with 1040s for another year. If you’re one of the millions of Americans who have to pay, however, your agony may be just beginning.
Now is the time when you can make things easier on yourself, or make them worse. As with many other areas of finance, there are smart ways and stupid ways to owe the IRS--and smart ways and stupid ways to pay up.
First, here’s something to keep in mind for next year. Just because you owe taxes doesn’t mean you have to put off preparing or filing your return. The IRS allows you to electronically file as early as January, while putting off your payment until the due date (which this year is Monday, because April 15 falls on a Saturday). Just use the form in the electronic filing kits that instructs the IRS to make an automatic withdrawal from your bank account April 17. Electronic filing is available for all but the most complex returns.
Some people resist such automatic debits because of an absurd fear of giving the IRS their bank account number. Trust me, if the IRS wants to get your bank number, it will; chances are it already has it. It’s on your checks, for goodness sake.
Owing the IRS is not necessarily bad. It could mean you made a lot of money last year--which is good, remember? And owing a couple of hundred bucks or so just means you were smart about your withholding and estimated tax payments--you didn’t give the government an interest-free loan of your money. (For more details on that, see my colleague Kathy Kristof’s March 19 column on withholding.)
But if you owe much more than you did last year, or you owe more than you can pay, you could be in trouble.
The IRS assesses penalties when taxpayers fail to withhold enough from their paychecks or make proper estimated tax payments during the year. You’re off the hook if you owe less than $1,000, or if the amount you did pay throughout 1999 was at least 90% of your current tax bill, or 100% of your 1998 tax bill if your adjusted gross income was $150,000 or less. If your income is more than $150,000, the threshold is 108.6% of the 1998 bill.
Confused yet? That’s not surprising. It would be smart to consult a tax advisor for details and to make sure you don’t run afoul of the withholding rules next year.
If you do owe the penalty, you can use Form 2210 to figure it, or just let the IRS do it for you and send you the bill.
If you can come up with the cash to pay your taxes, do so; although both the IRS and the state Franchise Tax Board allow you to charge your taxes using MasterCard, Discover or American Express, that’s usually an expensive way to go. You have to pay a convenience fee of about 3% of the bill, plus whatever interest rate the card charges. For most people, the cost will far outweigh the value of any frequent-flier miles they collect.
If you can’t pay right away, you’ll need to weigh the cost of using a credit card against the cost of setting up an installment agreement. Approval is far from automatic, but tax preparers say both the IRS and the FTB have become much more amenable to installment agreements, especially when the tax debt owed is less than $10,000, but you will have to pay penalties and interest on the unpaid amount.
To request an installment agreement, complete and attach Form 9465 to your return. To request an installment plan from the state, attach FTB Form 3567 to your state return. If you can, include a check for as much as you can possibly pay; the more you pay now, the less you’ll have to pay in penalties and interest in the long run.
What if your tax debt seems like more than you can possibly ever pay? It’s time for drastic action, otherwise known as an “offer in compromise.”
This is an area where you probably need the help of a pro. Although both the IRS and FTB are getting better about accepting such compromises, failing to dot the right i and cross the proper t on the request form can get your request rejected. The tax agencies will review your income, assets and debts to determine how much it could reasonably be expected to collect.
If your tax debt is under $50,000 and you want to make an offer in compromise, your preparer may be able to use a pilot project developed by the Fresno IRS service center to speed your offer along. If accepted, this could save you money by limiting the total taxes, interest and penalties you’d have to pay. The project is available only to preparers and only for taxpayers covered by the Fresno district, which includes Los Angeles and Central and Northern California but excludes Orange, San Diego, San Bernardino, Riverside and Imperial counties. Again, talk to a tax professional for details.
Whatever you do, don’t fail to file if you owe, especially if you received W-2s or 1099s. Those make it easy for the tax agencies to track you down, and penalties for not filing are much higher than for not paying. You’ve already got enough trouble.
For more information about taxes, visit https://www.latimes.com/taxes.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
