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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2011
CCH Whole Ball of Tax
is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Eric Scott
(847) 267-2179
eric.scott@wolterskluwer.com

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.

 
2011 CCH Whole Ball of Tax
Release (24) | Back to WBOT

2011 CCH Whole Ball of Tax

Contact:
Leslie Bonacum
, 847-267-7153, mediahelp@cch.com
Eric Scott, 847-267-2179, eric.scott@wolterskluwer.com

CCH Outlines Options When You Can’t Get Your Taxes Done on Time or If You Owe Money You Don’t Have

(RIVERWOODS, ILL., January 2011) – Not all taxpayers rush to finish their taxes and wait for a big refund. Some can’t find the time or don’t have the information to finish their tax return and some don’t have the money they need to pay their tax bill. Ignoring tax season, however, is not a good idea, says CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

“If you can’t file on time, make sure to get an extension and pay what you owe or make payment arrangements with the IRS,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “Otherwise, you are immediately facing a failure to file penalty as well as interest and additional costs.”

Extension Allows More Time to File But Not to Pay

Taxpayers who aren’t able to finish their tax return should file for an extension, using Form 4868, estimating their ultimate tax liability and paying as much of it as they can by the April 18, 2011 due date. An extension automatically provides six additional months to file – until October 17, 2011. For the 2010 tax season, the income tax deadline is three days later than usual, April 18, 2011, due to observance of the Emancipation Day holiday in the District of Columbia; the extension deadline also is two days late, October 17, 2011, as the 15 th falls on a Saturday.

“With an extension, you get more time for filing, but you will owe interest on any underpayment, starting on the original date. If you underpay by more than 10 percent, you may be subject to a penalty,” Luscombe noted. “In addition, if you’re due a refund, you won’t get it until after you actually file your return.”

For taxpayers who are owed a refund, starting with the 2010 tax season, the U.S. Treasury Department is testing the option of allowing low and moderate income taxpayers to choose to have their refund placed on a debit card, called MyAccountCard. In particular, this would allow individuals that do not have a bank account to have another option other than a paper check mailed to them; like bank deposits, funds on the debit card are backed by Federal Deposit Insurance Corporation.

Ramifications of Ignoring Tax Deadlines

If a taxpayer does not file a tax return and pay the taxes they owe when due, the IRS can take several steps.

First, the taxpayer is subject to the 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.

For example, a taxpayer owing $600, who did not pay what they owed for three months, would owe $600 plus $30 for each of the three months they delayed paying, or $90. And, as their payment is more than 60 days past due, another $10 would be owed to meet the $100 minimum penalty.

In addition, the IRS can file a substitute tax return for the taxpayer based on information it has from other sources. However, the substitute tax return will not include exemptions or expenses to which the taxpayer may be entitled. So, it may overstate the actual tax liability.

Next, the IRS will start a collection process. This can include placing a levy on the taxpayer’s wages or bank accounts. The IRS also can file a federal tax lien on the taxpayer’s property.

“If you don’t file, you are going to owe more and you’re going to have to get through a lot more red tape to set things right,” Luscombe said. “If you can’t pay by the deadline, though, there are a few options you can pursue.”

Borrow or Charge

Taxpayers who owe and can’t pay their entire tax bill when it’s due but can pay the full amount within 120 days, can ask the IRS for a short-term administrative extension by calling 1-800-829-1040.

Taxpayers who need more than 120 days to pay their taxes have just a few options for paying off their full tax debt over time: they can try to secure a bank loan, such as a home equity loan, or use their credit card. Or they can arrange an installment agreement with the IRS.

While going into debt to pay off a debt may not seem the best option, the interest rate and fees assessed by a bank or credit card issuer may be lower than the interest and penalties assessed by the IRS. For example, 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 setting up an installment agreement. Additionally, taxpayers with credit cards offering money back or other perks could get a little extra for their troubles.

All credit card payments have to be made electronically, through personal tax software, a paid tax preparer or through credit card service payment providers.

Installments with the IRS

In some instances, dealing directly with the IRS may be the best route. However, first taxpayers have to make sure the IRS is willing to work with them.

The IRS is required to accept installment payments if a taxpayer has a good filing and payment record, the amount owed is not more than $10,000 and it can be paid off within three years. However, the IRS can charge interest, which varies with the federal short-term rate and is adjusted quarterly. Also, the IRS 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 the taxpayer has filed and paid taxes on time for the last five years and their current withholding and estimated tax payments are sufficient to cover taxes for the current tax year.

Taxpayers apply for an installment agreement on Form 9465, detailing the amount they owe, the monthly amount they propose to pay and the date of the month (no later than the 28th) on which they’ll make the payment. They also must pay a one-time fee, usually $52 or $105, when the IRS accepts their installment payment agreement. The lower fee is for a direct-debit arrangement. In addition, people who fall beneath poverty guidelines need only pay a $43 fee.

Taxpayers owing $25,000 or less in taxes, interest and penalties can set up a payment agreement online, but the IRS can have a say in the amount of their monthly payment. Go to irs.gov and choose “Apply for Online Payment Agreement (OPA)” from the “Online Services” drop-down menu.

Taxpayers owing more than $25,000 in taxes, interest and penalties may be able to set up an installment plan, but they have to file Form 433-F , “ Collection Information Statement,” in addition to Form 9465.

Taxpayers also can have installment payments made directly from their paycheck by calling the IRS at 1-800-829-1040 to set up this payment option.

Reaching a Compromise

In some instances, the IRS may accept less than the full amount due – a so-called “offer in compromise.” This typically occurs if the taxpayer can convince the IRS that the tax debt in its entirety could never be collected or there’s a dispute between them 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, an offer in compromise can be worked out simply by convincing the IRS that collecting the debt in full would impose an undue hardship. 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 anyone who proposes 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. 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.

An initial payment must be made with an offer in compromise. If they are proposing to pay in five installments or fewer, they have to include 20 percent of the total amount they propose to pay when submitting the offer. If they propose a longer payment period, they have to include an amount equal to their first payment under their proposed plan. The taxpayer must also continue to make payments in accordance with the proposed plan while the offer is being considered. (The Fiscal Year 2010 budget proposal calls for eliminating the requirement for partial payments at the time of application for an offer in compromise; however, it has not been introduced yet into final legislation.)

Keeping Up on Payments

The IRS has said that it will try to go easy on people who can’t keep to their original installment agreements of offers in compromise due to a change in their personal finances. Anyone having difficulty is advised to call the IRS at 1-800-829-1040. However, Luscombe notes, the IRS has not revealed how far it will go to accommodate taxpayers in difficulties before they resort to measures such as liens and levies.

Adjusting Withholdings to Avoid Future Problems

Anyone having trouble paying this year’s tax bill may also have trouble paying next year’s tax bill. To keep their debt to the IRS from increasing even more, taxpayers should use Form W-4 to adjust their withholding and make estimated tax payments to the IRS, if necessary.

“If you’re still in debt over last year’s taxes, it’s hard to have more withheld from your paycheck, 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 (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).

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