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Franklin Prosperity Report: 4 Steps to Take Now If You're in Debt to the IRS

By    |   Friday, 31 January 2014 04:47 PM

It’s probably obvious that not paying your taxes is a bad idea. The Internal Revenue Service is a powerful entity, and if it gets a hold of you financially, well . . . let’s just say it’s not usually a pleasant experience.

But if you owe, there’s no reason to panic, either. You can sidestep disaster, if you take action. We consulted with Bonnie Lee, president of Taxpertise, a firm that helps clients with tax-problem resolution.

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Lee, an enrolled agent authorized to represent taxpayers before the IRS, is the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Businesses the IRS Doesn’t Want You to Know. She outlined four steps to settling up with Uncle Sam if you’re in debt to the IRS and aren’t sure what to do:

Step 1: File Your Return If You Haven’t

It’s too late for this year, but note that, once the April 15 deadline passes without any communication from you, the IRS starts the clock on penalties and interest charges that rack up fast. The first, a “failure to file” penalty, is steep: 5 percent of your tax owed for every month your return is late (capped at five months, or 25 percent total).

If you filed an extension, you might think you’re in the clear where penalties are concerned. Unfortunately, that’s not the case. “A lot of people think that if they can’t pay, all they need to do is file an extension,” Lee says. “But that’s extending the time to file, not pay.” In other words, you have to pay your estimated tax owed by April 15, even if you need longer to get the paperwork in order.

By filing an extension, you avoid the “failure to file” penalty. However, you’ll still be hit with a late payment penalty if you don’t pay that estimated tax. It’s significantly less — 0.5 percent of your taxes owed for each month you’re overdue — but it accumulates until your taxes are paid in full, up to 25 percent of your taxes owed.

But that’s not all. Just like a bank or credit card company, the IRS charges you interest when you “borrow” its money by not paying your taxes. The rate varies, but it’s calculated using the federal short-term rate and adding 3 percent.

Of course, if you don’t file your tax return or request an extension, you’re liable for all three: the failure to file penalty, the late payment penalty, and any interest.

In other words, it’s a smart move to file your return, and soon. In addition to avoiding fees, you won’t miss out on money that’s rightfully yours.

After all, “you might have refunds due to you,” Lee says. To wit, one of her clients didn’t file a tax return for decades and then found out he could have received $65,000 in refunds over the years. But it was too late. “You can only go back three years [to get refunds],” Lee explains.

Step 2: Pay Your Tax Liability, However You Can

If your choice is between owing the IRS and owing anyone else, Lee says you should opt for the latter. In light of the penalties and interest the IRS charges, it’s much better to use a credit card, get a home equity loan, or ask a relative for help so you can make the tax payment, she says.

If you can’t find a way to pay, you still have options. When you submit your return, you can attach Form 9465 (Installment Agreement Request), Lee says. “Fill in how much you’re paying with the tax return, and how much you can pay each month going forward.”

Step 3: If You Can’t Pay, Strike a Deal

If paying the amount due would truly be burdensome for you, Lee says it’s time to pick up the phone. “Contact the IRS and let them know,” she says. “The best thing to do is come forward. Especially right now, with the economic climate of the past five years, people are getting let off the hook by the IRS.”

You may be offered alternatives such as a short-term extension to pay or an offer in compromise, in which the IRS agrees to accept less. It may even waive some of the penalties you’ve accrued. The IRS won’t waive the interest charges, however, so it’s important to pay as much as you can, and quickly.

Step 4: Set Yourself Up for Success

Take steps now to set things right for next year’s taxes. Lee recommends reviewing your workplace tax withholdings to make sure you’re taking the right number of exemptions and have the correct filing status (i.e., single, married filing jointly, etc.). If you’re self-employed, be aware that you may need to make estimated tax payments each quarter.

New life circumstances can drastically affect your taxes, Lee adds. “[Re-examine your tax situation],” she says, “if you’re going through major changes, such as getting married, going through a divorce, refinancing a house, or pulling money out of a retirement plan. If you lose a dependent, you could be in a higher tax bracket.”

Sit down with a tax professional or run your information through a tax preparation program to do some projections, Lee says. Then make an estimated payment, so when April 15 rolls around next year, you’ll have no surprises.

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Friday, 31 January 2014 04:47 PM
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