Don’t Let Your Credit Status Go Sour by Trying to Hold on to a Windfall

Question: I have a problem with a department store credit card. For four months, this store showed on my statement that I had a $170 credit. I finally took the statement to the store, which verified that I did have a credit and allowed me to use it to offset a $235 purchase of linens. I paid the difference with my Visa card. Now the department store is saying that there is a mistake, that I didn’t really have a credit and that I owe $170. As far as I’m concerned, I don’t owe anything. I didn’t do anything fraudulent or false. But since then I have had a tremendous problem with their collection people. Do you think I need a lawyer to take them to court?

Answer: You left out one rather important detail. Did you legitimately incur a credit at this store?

You know whether the merchant originally made a mistake in your favor. If it did, you’re just paying the piper for taking advantage of the store’s bumbling. In that case, you should hurry up and pay the debt before the collection efforts do any more damage to your credit rating.

(Technically, the store might also try to repossess the property you purchased, although it’s highly unlikely the collection agency will go after your used towels and sheets.)

If you really did have a credit at this store--for previously returned merchandise, for example--then you have a legitimate beef. Take the receipt that shows the credit to the store’s credit department, along with your statements. If you can’t resolve the issue directly with the merchant, you may need to contact the Federal Trade Commission for help.

Consider Hiring a Pro to Do Battle With IRS

Question: I mailed in my year 2000 tax return on time, and with the proper payment. Two months later, I received a letter from the IRS requesting that I pay a penalty of $5,671, claiming that my payment was delayed. To make a long story short, I’ve been getting the runaround ever since, and the IRS took my $600 refund and applied it to the penalty it said I owed them. Naturally, I will have to take the IRS to court. Having had this kind of experience before, I know that the costs will exceed the penalty. My question therefore is: Would I be able to take the case to small claims court, knowing that I will have to limit my demand to $5,000?

Answer: If you insist on taking the IRS to court, you won’t be able to use regular small claims court. Your choices are federal district court, U.S. Court of Federal Claims, the U.S. Tax Court or the small cases division of the U.S. Tax Court.

But if you’ve battled the IRS in court before, you know what an expensive, arduous process that can be. How about saving yourself some time and headaches by hiring a tax pro to handle this situation instead?

A certified public accountant or enrolled agent who specializes in tax controversies may be able to solve your problem with a couple of phone calls. These specialists have contacts within the IRS and are used to ironing out such tangles. Many taxpayers who have beaten their heads against the IRS wall for months are amazed to find out how quickly their problems can be solved by someone who knows what he or she is doing.

Tapping Pension Early Can Result in Penalties

Question: In 1993, I was laid off from my job at age 49. Since I had more than 10 years with the company, I was allowed to receive my pension as early as age 55. Once I hit that age, I requested a lump-sum benefit because I had bills to pay from being out of work. I paid the appropriate income taxes from the distribution on my 1999 tax return. This month, I received a letter from the IRS stating that I owed an additional $7,000 in penalties and interest for 1999 because the lump-sum payout was considered an early distribution. Nowhere in the paperwork I received from my company did it state I would be subject to this 10% penalty. Didn’t it have an obligation to tell me? There are many company pension plans that allow you to retire after 30 years of service, some even before age 50. Are these people all subject to the 10% penalty?

Answer: The answer to your last question is yes. Anyone who taps a retirement fund before age 59 1/2 can be subject to penalties. That’s why you should always hire a tax professional before you touch your retirement money. And you should never, ever, rely on your company alone for retirement or tax advice.

There are exceptions to the 59 1/2 rule, including one that allows you to avoid the penalty if you’re at least 55 when you leave the job from which you’re getting the distribution.

Note the wording. You must turn 55 by Dec. 31 of the year in which you leave your job. You didn’t turn 55 until six years after you left that job, so you have to pay the penalty.

If you’re in a state that penalizes early withdrawals, you can expect another tax bill from them. California, for example, charges a 2.5% penalty for premature distributions.

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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 moneytalk@la times.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.la times.com/moneytalk.