HELP! I CAN’T PAY MY TAX BILL

You’re almost done with your federal income tax return, and you’re already thinking of ways to spend your refund. Then, the unthinkable happens–instead of a refund, you find that you owe $3,000. Whatever the reason, you’re now in the unenviable position of owing money to the IRS–and you don’t have the cash. What do you do now?

First, don’t panic. You have several options. That said, however, don’t put your head in the sand. The IRS won’t go away, and the amount you owe will only grow larger if you procrastinate. If you ignore your tax bill entirely, not only will interest and penalties accrue, but the IRS may go after your assets and wages as well. You can avoid all of that unpleasantness by finding a way to pay your taxes. Here are some possibilities.

Pay what you can afford when you file the return, then wait for a bill

Perhaps you’re between paychecks right now, or maybe you just paid a substantial car repair bill. For one reason or another, you’re suffering from a short-term cash flow problem. You’ll eventually have the cash to pay your tax bill–you just don’t have it right now. If that’s your situation, you may want to consider the following approach. First, pay as much as you can when you file your tax return. This will help reduce the penalties and interest that you’ll be charged.

Next, wait for the IRS to send you a bill for the remaining balance. This should take roughly 45 days. Perhaps by then you’ll have enough cash to pay the bill in full. If not, call the number or write to the address on the bill you’ve received, or visit the nearest IRS office to explain your situation. Based on the circumstances, you could qualify for an agreement to full pay within 60 or 120 days. The IRS is willing to offer these short-term agreements to full pay in order to assist in tax debt repayment. You can request an agreement length depending on the specific situation.

One problem with this approach, however, is that interest and penalties continue to accrue on the unpaid balance. So, while you may buy yourself some time, the total amount that you’ll end up paying may be much higher than it would have been if you had paid your tax bill in full when due.

There’s another thing to keep in mind–filing an extension will do you no good. An extension simply extends the time to file your tax return; it doesn’t extend the time to pay your tax. Whatever you do, file your return on time. A timely filed return can reduce your subsequent penalties.

Borrow money from a relative or take out a loan to pay your bill

One of the easiest ways to pay your tax bill may be to borrow the money from a relative or close friend. Borrow whatever you must to pay the bill in full, and draw up a payment plan to reimburse your benefactor. By paying the bill in full, you’ll be able to avoid IRS penalties and interest. And you may not have to pay interest to your relative or friend. However, be careful if you borrow more than $10,000; the below-market interest rules may trigger certain tax consequences.

If you can’t borrow from a relative or friend, consider taking out an unsecured bank loan or tapping into a home equity line of credit. Although the interest rates may be higher than interest that a relative or friend may charge, the interest will probably be less than the interest and penalties owed on the unpaid tax.

Pay by credit card

Another option is to pay your taxes by credit card. Obviously, you’ll want to use the card with the lowest interest rate. If you’re approaching your credit limit on a given card, you can split payments between two different credit cards. Contact the IRS to find out which credit cards are accepted.

Paying by credit card allows you to pay your tax bill on time. You’ll avoid both penalties and interest for late payment of taxes. However, the interest rate that your credit card company charges may be higher than what the IRS charges on installment payments or late payments.

You can make credit card payments through certain tax software programs or by calling (888) 272-9829 or (888) 729-1040. You can expect to be charged a fee by the company that the IRS has hired to process credit card payments by phone. The fee varies with the amount of taxes that are charged. This fee is in addition to any interest that your credit card company charges.

Pay by installments

An installment agreement is a monthly payment plan with the IRS. It’s the most widely used method for paying an IRS tax debt. The IRS is required to accept the payment of your tax liability in installments if your total tax liability (not counting interest, penalties, and other additions) is $25,000 or less, and if you meet a few other requirements.

To enter into an installment agreement, contact the IRS by telephone, mail, or online, and inform it that you’re unable to pay your tax bill in full. The IRS will send you Form 9465, Installment Agreement Request, to fill out, and the fee is $105 ($52 for direct debit installment agreements); you may qualify to pay a reduced fee of $43 if your income is below a certain level. Your tax liability may be spread out over three years, and payments can be automatically withdrawn from your bank account or made through payroll deduction. You’ll generally be expected to pay the maximum installment amount that you can afford. Although you won’t avoid interest and penalties with this payment method, you’ll avoid more severe collection action.

Propose an offer in compromise

If you meet certain criteria, such as doubt as to liability or doubt as to collectibility, you may want to propose an offer in compromise to the IRS on Form 656. This is a negotiated settlement between you and the IRS. Here, the IRS may agree to accept a lesser figure from you in full satisfaction of your tax debt. If you owe $20,000 in taxes, you might, for example, be able to settle for $5,000. However, there’s no guarantee that the IRS will accept your offer. There’s also generally a lot of paperwork to submit, including various IRS forms, financial statements, pay stubs, and bank records. And, there’s generally an up-front application fee of $150.

If you feel overwhelmed by the amount of your tax bill, though, and if you meet the criteria, an offer in compromise may be a good solution. It’s important to note, however, that the IRS won’t accept an offer if the IRS believes that the liability can be paid in full or through an installment agreement.

]]> http://herringcpagroup.com/timely-news/feed/ 0 http://herringcpagroup.com/choosing-a-tax-preparer/ http://herringcpagroup.com/choosing-a-tax-preparer/#comments Wed, 08 Feb 2012 00:05:04 +0000 Brenda http://herringcpagroup.com/?p=415

The income tax filing season has begun and important tax documents should be arriving in your mailbox. Even though your return is not due until April,you can make tax time easier on yourself with an early start. Here are some tips from the Internal Revenue Service to ensure a smooth tax-filing process.

1. Gather your records Round up any documents you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.

2. Be on the lookout W-2s and 1099s will be coming soon; you’ll need these to file your tax return.

3. Have a question? Use the Interactive Tax Assistant available on the IRS website to find answers to your tax questions about credits, deductions, general filing questions and more.

4. Consider all filing options There are many options for filing your tax return. You can prepare it yourself or go to a tax preparer. Give yourself time to weigh all the options and find the one that best suits your needs.

5. Consider direct deposit If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than a paper check in the mail.

If you use a paid tax preparer to file your return this year, the IRS urges you to choose that preparer wisely.

Even if a return is prepared by someone else, the taxpayer is legally responsible for what’s on it. So, it’s very important to choose your tax preparer carefully.

This year, the IRS wants to remind taxpayers to use a preparer who will sign the returns they prepare and enter their required Preparer Tax Identification Number (PTIN).

Here are ten tips to keep in mind when choosing a tax return preparer:

1. Check the preparer’s qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.

2. Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.

3. Ask about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Also, always make sure any refund due is sent to you or deposited into an account in your name. Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

4. Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990. Make sure your preparer offers IRS e-file.

5. Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.

6. Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

7. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

8. Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

9. Make sure the preparer signs the form and includes their PTIN. A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).

You can be confident that Herring CPA Group will provide the finest
professional service for your tax return preparation.

Are you a board member or manager for a non-profit?  The IRS has some excellent training materials available at their Stay Exempt website.

Reporting requirements for non-profits are extensive and leadership should be informed.  Herring CPA Group, PC has experienced staff members available to assist you as well.

What are the disadvantages of borrowing money from your 401(k)?

• If you don’t repay your plan loan when required, it will generally be treated as a taxable distribution.
• If you leave your employer’s service (whether voluntarily or not) and still have an outstanding balance on a plan loan, you’ll usually be required to repay the loan in full within 60 days. Otherwise, the outstanding balance will be treated as a taxable distribution, and you’ll owe a 10 percent penalty tax in addition to regular income taxes if you’re under age 59½.
• Loan interest is generally not tax deductible (unless the loan is secured by your principal residence).
• You’ll lose out on any tax-deferred earnings that may have accrued on the borrowed funds had they remained in your 401(k).
• Loan payments are made with after-tax dollars.

Standard business mileage rate  for 2012 remains at 55.5 cents, the rate set as of July 1, 2011.

The rate for computing deductible medical or moving expenses is 23 cents a mile.  The rate for providing services for charitable organizations remains at 14 cents a mile.

Visit our Tools and Links page to access useful resources.

Employers can quickly access both the federal and state tax portals to make payroll tax deposits.
All the forms you need for new hires and terminations are also readily available in one convenient location.