2006 CCH Whole Ball of Tax
Feeling Crunched at Tax Time?
CCH Says You Have Options
(RIVERWOODS, ILL., January 2006) – With April 15 approaching,
you may feel crunched for time, money or both. Perhaps your records are
in a mess and you just don’t have time to figure out what to put on every
line of every schedule. Or perhaps 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, a Wolters Kluwer business and a leading provider
of tax and accounting information, software and services (tax.cchgroup.com).
“The one thing that can make a bad situation worse is not
filing your return or requesting an extension. That brings on a failure-to-file
penalty, in addition to possible penalties and interest for failure to pay,”
said Mark Luscombe, JD, CPA and CCH principal federal tax analyst. “It’s
smart to file even if you can’t pay, and pay even if you get an extension
to file.”
Extension Allows More Time to File
If you aren’t able to fill out a complete return – because
you need more information or more time to cope with the information you have
– you should file for an extension, using Form 4868, estimating your ultimate
tax liability and paying as much of it as you can by April 15, Luscombe said.
“With an extension, you can get more time for filing, but
you will owe interest on any underpayment, starting on April 15. If you
underpay by more than 10 percent, you may be subject to a penalty,” Luscombe
noted. “Of course, if you’re due a refund, you won’t get it until you actually
file your return.”
Automatic Extension Now Six Months
An extension will automatically give you six additional months
– until October 15, 2006 – to file your 2005 taxes. This is a change from
previous years, when an automatic extension allowed only four months, and
you had to state a reason for getting an additional two-month extension.
“Increasing the length of the automatic extension will save
taxpayers some time and trouble, but it’s still smart to file as soon as
you can,” Luscombe observed.
Failing to get an extension, or not filing by the extended
date, can subject you to a failure-to-file penalty. The 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 said.
Just Charge It
But what if you can’t pay the tax due? You may be able to
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.
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 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 contiguous states with a monthly
income of less than $1,667 can apply for an offer without paying the fee.
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, taxpayers should 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, a Wolters Kluwer business
CCH, a Wolters Kluwer business (tax.cchgroup.com)
is a leading provider of tax, audit and accounting information, software
and services. It has served tax, accounting and business professionals and
their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting
Research Manager™ and the U.S. Master Tax Guide®. CCH is based
in Riverwoods, Ill.
Wolters Kluwer is a leading multinational publisher and information
services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion,
employs approximately 18,400 people worldwide and maintains operations across
Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in
Amsterdam, the Netherlands (www.wolterskluwer.com).
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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