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Link to special CCH Tax Briefings on key topics from 2004:
 

• American Jobs Creation Act
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• Working Families Tax Relief Act
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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.

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.

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 28^th) 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.

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.

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."

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.

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