- Up at 5 two days in a row. Sleepy. #
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- Woo! First all-cash grocery trip ever. Felt neat. #
- I accidentally took a 3 hour nap yesterday, so I had a hard time sleeping. 5am is difficult. #
- Wee! Got included in the Carnival of Personal Finance, again. http://su.pr/2AKnDB #
- Son’s wrestling season starts in two days. My next 3 months just got hectic. #
- RT @Moneymonk: A real emergency is something that threatens your survival, not just your desire to be comfortable -David Bach # [Read more…] about Twitter Weekly Updates for 2010-01-09
The Tax Man Cometh
- Image by brianjmatis via Flickr
Is the IRS after you? Did you forget to file your tax returns for the last 10 years? Are you worried that they are going to seize your bank accounts, leaving you broke and unable to finance your latest Pokemon acquisition?
There are many reasons people neglect to file their tax returns. None of the reasons are good. The usual reason is that you know you’ll owe money you can’t afford to pay, so you wrap yourself in denial and attempt to delay the inevitable. For future reference, the government always wins. Not filing is a temporary solution at best, and a really bad one at that. Not paying just guarantees that you will owe more penalties than if you had filed and gotten on a repayment plan. Avoiding your tax return will come back to haunt you eventually.
If you haven’t filed your tax returns, you need to do so as soon as possible. The longer you wait, the fewer options you have and the more likely the account seizures. Keep your money under your own control. Another problem with not filing is that the IRS will estimate your tax debt. The estimate is always in their favor. If you file, you get to list your deductions. If you don’t file, they give you the standard deduction and ignore almost everything in your favor. In some cases, this can mean they think you owe $10,000 when in reality, if you file, you will only possibly owe $1500.
To get started, you need to do is call the IRS at (800) TAX-1040. This call serves three purposes.
First, you need to confirm which years you need to file. Simply ask for the last year in which you have filed.
Second, request a transcript of all of your 1099s and W-2s. These are the forms that your employers, investments, and banks have sent to the IRS detailing your income. Over the years, it’s easy to lose paperwork, so this will ensure that you’re records match theirs. Depending on the time of the year, you should have the files in under a week. You’ll get one per delinquent year.
Third, this call gives you a chance to get on the “good debtor” list. You may have to get transferred to the collections department, but make sure you get someone to update your file with the fact that you are making good on your taxes. They will probably give you 30 days to file. Treat this as a hard deadline.
[ad name=”inlineleft”]Now that you have all of your paperwork, it’s time for the long slog. You have to do several years worth of returns, generally in one or two sittings. You can usually find back years of Turbo Tax on Amazon for cheap. As of this writing, the back years are under $10 per year. While you are filing, please keep in mind any charitable donations or business expenses you may have had. If you are missing a receipt for a major business purchase, never fear! The IRS does accept reasonable alternatives. I know of one case of an individual writing a letter to the IRS that read:
To Whom it May Concern:
Please accept this letter as a receipt for the purchase of a snowplow in the amount of $3000.
If you do this, you had better be able to back it up with the existence of an actual snowplow.
After you prepare your returns, look at the amounts you owe. You can only collect a refund for the last three years. If you owe more than you can afford to pay, you have two option, payment plans or settlement.
Payment plans involve delayed or continual payments. From IRS.gov:
Request an Extension of Time to Pay — Based on the circumstances, a taxpayer could qualify for an extension of time to pay. The IRS is willing to allow extensions of time to pay in order to assist in tax debt repayment. A taxpayer can request an extension from 30 to 120 days depending on the specific situation. Taxpayers qualifying for an extension of time to pay of 30 to 120 days generally will pay less in penalties and interest than if the debt were repaid through an installment agreement. Taxpayers can request an extension of time to pay using the Online Payment Agreement option available on thisWeb site.
- Apply for an Installment Agreement — The IRS may allow taxpayers to pay any remaining balance in monthly installments through an installment agreement. Taxpayers who owe $25,000 or less may apply for a payment plan electronically, using the Online Payment Agreement application. Alternatively, taxpayers may attach a Form 9465, Installment Agreement Request, to the front of their tax return. Taxpayers must show the amount of their proposed monthly payment and the date they wish to make their payment each month. The IRS charges a $105 fee for setting up an installment agreement. The fee is reduced to $52 for those who establish a direct debit installment agreement and $43 for those with an income below a certain level (for more information, see Form 13844). Taxpayers are required to pay interest plus a late payment penalty on the unpaid taxes for each month or part of a month, after the due date that the tax is not paid. A taxpayer who does not file the return by the due date — including extensions — may have to pay a failure-to-file penalty.
The IRS must accept your payment plan if your tax debt is under $10,000 and your proposed plan will pay it off within three years.
The other option is a settlement, or Offer in Compromise. Generally, only 10-15% of such offers are accepted. The IRS will rarely accept the off if they feel they can collect the debt for less than the amount owed. Don’t believe the guys on TV who pretend it is an effortless solution. From IRS.gov, the three acceptable reasons for OIC are as follows:
1. Doubt as to Collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
2. Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
3. Effective Tax Administration – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
If you have a settlement accepted, you have three options for payment. A lump-sum payment must be paid in 5 installments or less, a short-term payment plan may be paid over 2 years, and the long-term repayment option has no set payment. Each of these options must meet differing levels of potential repayment, including figuring your real assets(your house and investments). In addition, you must include a non-refundable first payment and a $150 application fee when you apply for the settlement.
No matter which option you take, you can’t run from government debt. It will catch up to you and that will always be more painful that dealing with it on your own terms.
Update: This post has been included in the Carnival of Personal Finance.
March 30 Day Project
For March, my 30 Day Project is to do 100 sit-ups in a single set.
Based on the results of my February project, I will be doing 5 sets, morning and night, as follows:
Set 1: Half of my maximum amount.
Sets 2-4: 3/4 of my max.
Set 5: Do sit-ups until my abs start to cramp, thus setting my max for the next session.
This month, I only have one project.
Insurance
On Tuesday, a potential customer took my business partner and I out for sushi.
The sushi bar was fun. There was a little canal going around the bar. The canal had little boats. The boats had little plates. The plates had sushi. Lots and lots of sushi. When you wanted something, you just reached out and took it.
Yum.
My only complaint with the place is the width of the chairs. If you’re going to use narrow chairs, you really shouldn’t choose chairs with armrests.
Between the narrow chairs, the armrests, and my fat butt, my cell phone got knocked off of my belt.
Crap.
I normally check my money clip, car keys, pocket knife, and cell phone every time I stand up, but didn’t this time.
I noticed it was missing 15 miles later.
Of course, when I called, no one answered my phone.
The restaurant hadn’t seen my phone.
When we went back to retrace our steps, my phone was nowhere to be found. Some busboy got a nice tip that night.
Now, I don’t carry insurance on my cell phone. I still have every cell phone I’ve ever owned, in working condition. Well, minus one, now. At $5/month, that has saved me more than $1000 over the years.
Of course, it’s a bit painful this week.
Thankfully, I sock a bit of money away every month to cover things that break. It’s my warranty fund. That, combined with a good(hopefully) find on eBay, means that losing my phone, while irritating, isn’t going to break my budget. It won’t actually touch my budget in any way.
On a side note, a parking ramp with a flat, “all night” charge and a lost ticket fee makes me angry.
The Lord Will Provide
Debtors like to make excuses.
When I used to work collections, I’d try to work out a payment plan to get people out of debt, and I often heard “The Lord will provide” as their only excuse for not paying the money they owed.
That’s crap. It’s not a financial plan. It’s not a life plan.
It’s a crappy excuse to make you feel better about why your life sucks, has always sucked, and will–most likely–continue to suck.
Over the weekend, I got to spend quite a bit of time with family, including some that we don’t get to see often. One couple in particular really stands out. Neither of them are employed. She’s got some medical problems and has several major surgeries recently. I’d give her a pass for that, but she was unemployed for many years prior to that. He used to have a job, but lost it a couple of years ago, and is now milking welfare with his wife and daughter. They recently lost their house and had to move in with his mother.
Neither one is looking for work. Between the two of them, they smoke 4-5 packs of cigarettes a day. They want to buy a house soon, or rent an apartment, or something. They aren’t very clear in their planning because, “It’s in God’s hands.”
No plan, no ambition, no goals. I don’t understand how anybody can go through life with no intention of improving it. How can you try to hide behind platitudes instead of making things better?
Here’s the bumper sticker that can actually improve your life: “Good things come to those who bust their asses and make good decisions.”
It’s not the easy path, but in the long run, it’s a better path and one of the few paths that doesn’t lead to royal life-suckitude.
It’s My Fault So Stop Me Now
One of my biggest problems with maintaining a goal is follow-through. Three weeks or six months into pursuing a goal, it becomes incredibly easy to rationalize setbacks. If my back hurts, it’s easy to skip some sit-ups. If a custom knife maker offers me a good deal, it’s easy to drop a significant part of my discretionary budget on a really nice knife. The rationalizations come pouring in when I see a good deal on Amazon. “I need to read that book” or “I’ve been waiting for the move forever.” The excuses don’t matter. As long as they are coming in, I will eventually cave to my inner impulse demon. How do I avoid that?
I try to make myself accountable to as many people as possible. At the beginning of the year, I posted my 30 Day Projects here, for the world to see. I post updates on a regular basis. Admitting my failure with the sit-ups was surprisingly difficult. I made myself accountable and fell short. That’s hard. Thankfully, none of you came around with a sjambok to make me regret my slip-up. When I was doing push-ups, my wife was more than willing to let me know when I slipped into bad form to try to squeeze out a few more before I collapsed. I count on that.
I count on my wife to help me stay on the right path. Eliminating our debt is easily the longest goal either of us have ever set for ourselves. Mutual support and mutual accountability are our main methods to maintain that goal. It is, after all, a marathon, not a sprint. When I want to buy more cookware, she reminds me that we already have something to serve the purpose. When she wants to buy the kids new jammies, I remind her that they have more than can fit in their dressers already. Neither of us are afraid to tell the other to return bad purchases to the store if it’s not in our budget. When we go shopping, we go through everything in the cart before we get to the checkout, to decide if we really need everything we picked up. We support each other.
If I couldn’t make myself accountable to my wife, my family, my friends, and–last, but certainly not least–the three people reading this, I would fold in the face of my marshaled rationalizations and leave my goals in the oft-regretted gutter. Thanks for that.
How do you keep yourself on track?
Update: This post has been included in the Money Hackers Carnival.
