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CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2005 CCH Whole Ball of Tax is available in print. Please contact:
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
Neil Allen
(847) 267-2179
allenn@cch.com
Link to special CCH Tax Briefings on key topics from 2004:
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2005 CCH Whole Ball of Tax
If You Owe the IRS, Don't Despair - and Do File
(RIVERWOODS, ILL., January 2005) – You’ve just taken a first look at your taxes,
and it’s not good news. You owe more than you had withheld, more than you paid
in estimated tax, more than you can afford to pay by April 15. It’s awfully
tempting to go to bed, pull the covers over your head and hope that the IRS
will go away. But that’s one temptation that has to be resisted at all costs,
according to CCH INCORPORATED (CCH), a leading provider of tax information,
software and services (tax.cchgroup.com).
"The one thing that can make a bad situation worse is not filing your
return. That brings on a failure-to-file penalty, in addition to penalties and
interest for failure to pay," said Mark Luscombe, JD, CPA and principal
federal tax analyst with CCH. "It also means that the statute of
limitations hasn’t begun to run, which in practical terms means the IRS will
have longer to examine your return and assess deficiencies once you do
file."
The failure-to-file penalty is 5 percent of the tax due for every month or
any fraction of a month that the return is overdue, capped at 25 percent.
However, there is a minimum penalty for any return not filed within 60 days of
the due date (plus any extensions) of $100 or 100 percent of the tax due,
whichever is less.
"The bottom line is that if you don’t file, you’ll almost certainly
pay more in the end, and you aren’t likely to sleep very soundly knowing that
the IRS may be looking for you, either," Luscombe observed.
Just Charge It
It’s often easiest to scrounge around, borrow from your family or sell a
prized collection on eBay so that you can mail the IRS a check for the full
amount due. But if you can’t pay all of your tax bill with what you have at
hand, there are two options for paying off your full tax debt over time –
using a credit card or arranging an installment agreement with the IRS.
For several years now, it has been possible to pay your taxes with a credit
card, and there are some advantages to taking this route. One is that the
"convenience fees" of 2 to 3 percent charged for making the credit
card transaction may be lower than the fee charged by the IRS for an installment
agreement. Another is that you may earn frequent flyer miles or other perks by
using your card. If you owe a relatively small amount and if you pay it off
within a few months, the total costs can easily be less than if you deal with
the IRS directly.
All credit card payments have to be made electronically, through personal tax
software, a paid tax preparer or through credit card service payment providers
that you contact by phone or over the Internet.
"All this assumes, of course, that you have a credit card with the
necessary spending limit," Luscombe noted.
Installments with the IRS
There are some good reasons to deal directly with the IRS itself, however.
One is that costs can be lower in the end because the IRS charges relatively low
interest on installment payment agreements. The other is that you may be able to
convince the IRS to accept less than the full amount due – a so-called
"offer in compromise."
"Until 2004, with the installment agreement, you were agreeing to pay
the full amount, with interest, whereas with an offer in compromise, you and the
IRS reach an agreed upon amount you will pay," said Luscombe.
"However, the American Jobs Creation Act, enacted in 2004, now permits the
IRS to enter into installment agreements for less than full payment."
Under a 1998 law, the IRS is required to accept installment payments if you
have a good filing and payment record, the amount owed is not more than $10,000
and it can be paid off within three years, but they can charge you interest,
which varies with the federal short-term rate and is adjusted quarterly. Also,
they can assess a 0.25-percent penalty for failing to pay in any month the
installment payment is in effect. Any installment agreement that the IRS is
required to accept must still be for full payment.
The "good filing and payment record" means you’ve filed and paid
your taxes on time for the last five years and that your current withholding and
estimated tax payments are sufficient to cover taxes for the current tax year.
You apply for an installment agreement on Form 9465, detailing the amount you
owe, the monthly amount you propose to pay and the date of the month (no later
than the 28th) on which you’ll make the payment. You’ll be
charged a one-time $43 fee when the IRS accepts your installment payment
agreement.
"If you owe a relatively small amount, the $43 fee may wipe out any
savings you might realize from paying the IRS a lower rate of interest than your
credit card company, but it could well be worth it if you will be paying off a
large amount over a long time," Luscombe noted.
Let’s Make a Deal
Offers in compromise normally arise because you convince the IRS that the tax
debt in its entirety could never be collected or there’s a dispute between you
and the IRS as to how much is actually owed, but neither party wants to enter
into a legal battle to resolve the issue. In rare instances, you may be able to
work out an offer in compromise even when there’s no doubt about the amount
you owe and its collectibility, but you can convince the IRS that collecting the
debt in full would impose an undue hardship.
At one time, offers in compromise were very rarely reached, and the IRS would
often continue to try to collect the debt through liens and levies. For example,
if a taxpayer’s actual living expenses were above the national or local
allowable standards, the IRS could quickly reject the offer in compromise. Now,
however, the IRS is supposed to be less rigid, determining acceptable expenses
based on facts and circumstances of each taxpayer to make sure that the
individual can still afford living expenses while paying his or her tax bill.
Nonetheless, taxpayers should be prepared to bare their financial souls when
they apply for an offer in compromise on Form 656 and truly make a serious
offer.
The IRS has indicated that it will have little patience with taxpayers who
propose settling their tax debts for "pennies on the dollar" and warns
that many unscrupulous promoters are urging people to make such offers, while
charging them excessive fees for their dubious advice.
"The offer in compromise path is meant to be somewhat painful,"
Luscombe warned. "It is meant to force you to dip into your savings or even
liquidate them, sell assets and lead a pretty frugal life until your debt is
paid off. Don’t trust anyone who says you can use it while you still keep a
fleet of nice cars, boats and motorcycles in the backyard of your vacation home
and dine out in nice restaurants every day of the week."
There’s a $150 fee charged for offers in compromise. People who fall below
certain income levels based on Department of Health and Human Services poverty
guidelines can ask for a waiver with an "Application Fee Worksheet,"
which is now included in the basic offer in compromise package. For example, a
family of four living in the 48 continguous states with a monthly income of less
than $1,667 can apply for an offer without paying the fee.
Private Collectors for the IRS
The IRS has a formidable reach and the legal power to go after bank accounts
and property. Even so, and despite the availability of installment agreements
and offers in compromise, many people have not paid their tax debts.
This year, the IRS will begin using private firms to collect some of these
unpaid obligations. Unlike the IRS itself, the collectors will not have any
authority to negotiate with taxpayers about the amounts owed and in fact are
supposed to have the bare minimum information about the taxpayers and their
returns.
"Despite these assurances, there is some concern about the IRS sharing
any information at all with anyone," Luscombe said. "Although private
collectors are used by the departments of revenue in some states, when the IRS
tried using them in the past, the program was shut down due to public
pressure."
Avoiding Future Problems
Anyone who feels stretched to pay this year’s tax bill is likely to have
another problem looming on the horizon: next year’s tax bill. Painful as it
may be, Luscombe urges taxpayers to use Form W-4 to adjust their withholding and
estimated tax payments, if necessary, to keep debts to the IRS from snowballing.
"It’s tough to have additional amounts withheld from your paycheck
when you’re already in an installment agreement or tapped out from last year’s
taxes, but the IRS is one creditor that most people don’t want to have,"
Luscombe said.
About CCH INCORPORATED
CCH INCORPORATED (tax.cchgroup.com),
based in Riverwoods, Ill., is a leading provider of tax and accounting information,
software and services. CCH has served tax, accounting and business professionals
and their clients since 1913, providing them with the most authoritative, timely
and comprehensive tax resources. CCH is a Wolters Kluwer company (www.wolterskluwer.com).
Wolters Kluwer is a leading multinational publisher and information services
company. The company’s core markets are spread across the health, tax,
accounting, corporate, financial services, legal and regulatory, and education
sectors. Wolters Kluwer has annual revenues (2003) of €3.4 billion, employs
approximately 18,750 people worldwide and maintains operations across Europe,
North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam,
the Netherlands. Its depositary receipts of shares are quoted on the Euronext
Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
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nb-05-17
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