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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.
Debt Scams
When you are up to your eyeballs in debt, praying for a step-stool, sometimes life–more accurately, con-artists–try to trip you when you are vulnerable and look for a solution. They aren’t muggers on the street. They come at you wearing ties, invite you to a real office, with real furniture and a real nameplate on a real desk. They are a real company, but that doesn’t mean they aren’t trying to scam you out of the little money you have left to put towards your debt.
Yes, I am talking about debt management scams. These scams come in 4 main varieties.
Debt Settlement companies instruct you to stop paying your bills completely and send them the money instead to be placed in a settlement fund. When your creditors get desperate enough, they will be willing to settle for pennies on the dollar.
In theory, this can be a good strategy for some debtors. Unfortunately, it has some drawbacks, even if the company is legitimate. They tend to charge high fees as a percentage of your deposits. Some take another fee when a settlement is accepted. The entire time you are building your settlement fund, your credit rating is sinking, leaving you open to being sued or garnished. The bad companies take the fund and run, while even the good companies can’t guarantee your creditors will play ball.
Ultimately, they aren’t doing anything you can’t easily do yourself. If you want to go the settlement route, stop making your payments and funnel the money into a savings account that you will use to offer settlements from. It takes discipline, but there is no upside to paying someone else for the same function.
Debt Management plans are used when you owe more than you can afford to pay. These companies work with your creditors to adjust interest rates and minimum payments and they try to get some fees waived for you.
A good company will work with you and your creditors to make sure everyone is working together towards the goal of eliminating the debt. A bad company will tell you they are working with your creditors while ignoring any contact from the creditor. They’ll tell you the creditor isn’t willing to negotiate while never stepping up to the negotiation table. Another trick is to offer the creditor a set payment, with a “take it or leave it” clause. Any input from the creditor is interpreted as a refusal to participate. This, coupled with high fees paid by the debtor, make debt management firms a risky proposition. Most states require the firms to be licensed. Check to make sure they are before giving them any information.
Debt/Credit Counseling companies work with you to establish a budget and eliminate expenses; in effect, they are training you to be in control of your finances. They are often organized as a nonprofit, but not always.
Some–the sleazy ones–lie about what they are doing, or attempt to misconstrue what you are agreeing too. Be careful not to use your home as collateral to consolidate unsecured debt and don’t walk into a Chapter 13 bankruptcy without that being your intention. Both of those are common debt counseling scams. If the company isn’t able to provide all of the details of a transaction–company name, address, licensing information–or they aren’t willing to spend as much time as necessary explaining the details of the transaction, walk away. This is your life, you are in charge of it. Don’t let anyone bully or prod you into signing something you aren’t comfortable with.
Credit Repair is almost always a scam. There are ways to get correct bad information removed from your credit report. If the information is correct, those methods are illegal. There are two legal methods to repair your credit. First, stop generating bad credit. Make your payments on time and eventually, the bad items will fall off. Second, write letters disputing the actual incorrect items on your credit report. There are no quick fixes, and anybody telling you different is flirting with a jail sentence, possibly yours.
How do you avoid the scammers?
- Be skeptical. If it looks to good to be true, it probably is. There is no such thing as a magic wand to fix your credit and make your debt disappear. Bankruptcy + 10 years of your life is the closest thing to magic credit repair in this world.
- Only use a legitimate credit counselor. Verify them through the Better Business Bureau and the National Foundation for Credit Counseling (1-800-388-2227 or www.nfcc.org)
- Check the license. Most states require credit and debt counselors to be licensed. If they’re not, run away and report them.
- Read the find print. Don’t sign anything you don’t understand. Like every other piece of your financial life, own the transaction. Know what your are doing, or don’t do it.
- Are they willing to work with you? If they’ve got a generic plan that doesn’t account for your specific situation, they are probably a con. At the very least, they are a worthless company and a waste of both time and money.
- Are they willing to work with your creditors? If not, they won’t be accomplishing anything for you.
- How much do they cost? Higher fees may not be an indicator of a scam, but call around and find out if they are in the right ballpark. Triple or quadruple the going rate is a sign of someone who will disappear late one night, with your hopes, dreams and savings in tow.
- Above all else, trust your gut. If it doesn’t feel right, it probably isn’t. There is nothing a counselor can do that can’t wait a few days while you check them out.
There is no magic bullet to kill debt. You’re not fighting a werewolf, you’re fighting a lifetime of bad or unfortunate choices and circumstances. It’s important to keep a realistic outcome in mind.
Update: This post has been included in the Carnival of Debt Reduction.
Avoiding Financial Traps & Saving Money on Big-Ticket Purchases
This is a guest post written by Jason Larkins. He writes at WorkSaveLive – a blog he started to help people change the way they think about their finances, careers, and lives.
Who doesn’t like to buy stuff?
Okay…I’m sure there are a few of you out there that take pride in never buying a new “toy,” but I know personally that I LOVE stuff!
Not to the point that I make dumb financial decisions that jeopardizes my family’s financial well-being, but I do have that natural American desire to have nice things and to be able to do fun stuff!
If you’re in the market to buy a Big-Ticket item (i.e. a new car, TV, or other technology gadget), what are some of the things you should be thinking through as you contemplate making the purchase?
The first mistake people make is buying on impulse. The massive majority of Americans don’t even have a thought process when it comes to buying toys, so that’s why I decided to dedicate a post on a few things you should ponder.
3 Financial Traps You Should Avoid
1. Avoid spending extra for add-ons, or features, that you’re never going to use.
It is easy to get an appliance or technology gadget that has a ton of amazing features on it – but why pay for them if you won’t use them?
Consider buying the item that may be a step below what you’re looking at.
I know that I personally love the thought of having an Ipad 2, but am I really going to utilize it to it’s full capabilities?
Probably not!
It doesn’t mean I shouldn’t have one, but it does mean I can look at the older Ipad and save some money. Or, I can avoid the purchase altogether if I don’t think it’s going to be worth the money.
2. Be cautious with offers such as “no money down,” “90 days same as cash,” or “12 months interest free.”
Nearly 88% of the “90 days same as cash” offers are actually converted to payments because the purchaser couldn’t pay off the bill before the offer was up.
3. Don’t buy it just because it’s the cheapest.
Always be sure to do research prior to your purchase – check consumer reviews and product reviews. Saving money may not be worth it if the product breaks down quickly or doesn’t have the functionality that you’re looking for.
3 Strategies to Save Money
1. Prepare for large purchases and pay cash for them.
If you can’t pay cash for the item, then there is a good chance that you can’t afford it.
Determine how much money you will need to spend on a particular item and save up for it! This is going to help you in a couple of ways:
- It will help you avoid buying on impulse.
- If it takes awhile to save up for the item, then this will give you valuable time to really determine if it’s something you WANT badly enough to pay that kind of cash for it.
- It will allow you to ask for a DEAL. Every retailer pays a fee to run a debit/credit card. If you’re paying in cash the worst you can do is to ask for that 2-3% discount the store would be saving!
2. Buy at the end of the month, or at the end of the year!
Consumers rarely think of this, but it’s important for you to know that every store (and store manager) has monthly/yearly sales to report.
If they’re wanting to close out the month/year strong, they’re much more inclined to offer you a deal on whatever you’re buying!
3. Avoid the extended warranty!
Insurance (in general terms) is the act of transferring risk – the more people that pool money together to help mitigate risk (buy insurance), then the lower the cost of the insurance becomes.
The reason to avoid the extended warranties is because the cost you’re paying to cover your item also includes: commissions paid to the retail store, overhead for the insurance company (wages for employees, building costs, utilities, etc), and some profit for the insurance company as well.
Sure, you may be in the miniscule percentage of buyers that has their item break down on them, but the reality is that it’s unlikely.
If it was likely for your item to break down, then the insurance wouldn’t be available because it wouldn’t be a profitable endeavor for the insurance company (and they’d be out of business).
Whenever you’re buying something that has a large price tag, you should develop a process that you think through before buying it!
Always pay in cash, get a deal, and make sure you actually need everything you’re paying for.
Toxic People
You should never be in the company of anyone with whom you would not want to die.
-Duncan Idaho, from God-Emperor of Dune
Some people suck the life out of everyone they encounter. Whether it be through lies, unreasonable demands, emotional abuse or manipulation, or just a vile personalty, the people they meet are worse off for the encounter. The people they interact with every day are screwed.
My time is too precious to waste any of it unnecessarily on people who remove value from it. I like being with people who enrich my life, instead.
Unfortunately, since I’m not an advocate for the use of hitmen, not every toxic person is easy to eliminate from your life.
Toxic people come in 3 basic varieties: professional, personal, and family. There is some overlap between the categories.
The personal category is easiest to deal with. These people aren’t relatives or coworkers, so you won’t see them at family gatherings or at work. I’ve dealt with these people in two ways.
First, there is the direct approach. One former friend, who was really only a friend when it was convenient for him(a pure leech), got told that he wasn’t invited to one of our parties because I was inviting his ex-wife, instead. That was the last time he called me.
The second option is far more passive. I set up a contact group in my phone called “Life’s too short”. At first, I set it up with a fairly insulting ring tone, but I later switched it to no ring at all. I don’t know they’ve called until I check my voicemail. It’s far less direct, but also far easier than the direct approach.
Dealing with the toxic people in your family is more complicated. You’ll see them at holiday gatherings, or hear about them during unrelated visits. You probably have a lot of memories growing up with them, and may feel some level of obligation–deserved or not–to maintain contact. It’s hard to break a tie that you’ve had your entire life.
Can you fix their behavior? It’s worth trying to have a frank discussion about how they are treating you, or the things they are doing. If the problem is that they are constantly bringing over their methhead boyfriends, banning the drug addicts from your home, while still welcoming the relative may be an acceptable fix. If the problem is a constant need to belittle you, demanding they stop may work. If the problem is a lifetime of emotional abuse, it probably isn’t fixable.
Is banishment an option? Can you put that creepy cousin on the Life’s Too Short list? You’ll still have to deal with him at family gatherings, but you can always leave the room when he comes in, right? Don’t engage, don’t participate in any conversation beyond a polite greeting, and don’t offer any encouragement towards regular contact.
It’s possible that it won’t be possible to fix their behavior and that you won’t want to banish the offender. If, for example, the offender is your mother (Not you, Mom!), you may feel a sense of obligation to maintain contact, or even be a primary caregiver at times. This is a line nobody else can draw for you. At some point, the current bad behavior could overwhelm the past obligations. When that happens are you prepared for it? That can be a traumatic break.
The other option, as cold as it sounds, is to wait it out. Nature will take its course, eventually. Can you wait that long, while maintaining your sanity and emotional equilibrium?
Professional toxic people include customers, vendors, and coworkers, none of whom are easy to get rid of.
If you own the business, you can fire your problem customers if the hassle outweighs the benefits you get from the relationship. You can find a new vendor, and you can fire the problem employees.
What happens if you are an employee?
If the problem is your boss, your options are to suck it up, talk to his boss, or find a new job. If the first is intolerable, and the second is impossible, it’s time to polish your resume.
If the problem is a vendor, you’ve got some options. Document the problems, first. Does he make inappropriate jokes, or badmouth you to your customers? Then, research the alternatives. Does one of his competitors offer an equivalent product or service? Take the documentation and research to your boss, or whoever makes that decision, and see if you can get your company to make the switch. The other option, is to request someone new to deal with at the vendor’s company, but that may not always be possible.
Finally, we come to the problem of toxic coworkers.
Some coworkers have the same problems as a toxic boss. Is the company vice-president the boss’s baby brother? You’re probably not going to find a win there. You’ll have to suck it up or move on.
Is the problem person working in an unrelated department doing unrelated tasks? It may be possible to start taking breaks at different times and leave him where he belongs: in the past.
Is the difficult individual sharing an office with you, demanding everything be done his way, and throwing daily tantrums? This is the one that has to be dealt with. He’s the one sucking the life out of you every single day.
First, start making use of a voice recorder. If you’ve got a smartphone, you’ve probably already got one. Otherwise, drop the $20 to buy one. This lets you document the evil. When his behavior goes hinky, record it.
Second, stand up for yourself. If he’s making unreasonable demands, tell him it’s inappropriate. He’s a bully, and bullies tend to back down when they are confronted.
Third, make sure the boss knows about the behavior. Yes, this is tattling. Get over it. If he wasn’t acting like he was a spoiled 4 year old, you wouldn’t have to tell the boss that he was. If the boss doesn’t know there’s a problem, he can’t deal with it.
Fourth, for any problem that isn’t directly aimed at you, ignore it. If he makes a habit of throwing a tantrum because somebody emptied the coffee pot, or because the company switched health plans, let him. Only get in the way if it’s directed at you. Over time, the tantrums will get more noticeable and out of hand, forcing the boss to deal with it, preferably by handing him a pink slip.
Your goal is documentation, awareness, and avoidance. Make the worst of it go elsewhere so you can be as productive as possible, document what you can, and let the boss become aware of the situation and how bad it has become. And be patient. This isn’t an overnight fix.
How do you deal with the toxic people in your life?
Money Problems – Day 6: Reducing Expenses
Today, I am continuing the series, Money Problems: 30 Days to Perfect Finances. The series will consist of 30 things you can do in one setting to perfect your finances. It’s not a system to magically make your debt disappear. Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.
I’m not running the series in 30 consecutive days. That’s not my schedule. Also, I think that talking about the same thing for 30 days straight will bore both of us. Instead, it will run roughly once a week. To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.
On this, Day 6, we’re going to talk about cutting your expenses.
Once you free up some income, you’ll get a lot of leeway in how you’re able to spend your money, but also important–possibly more important–is to cut out the crap you just don’t need. Eliminate the expenses that aren’t providing any value in your life. What you need to do is take a look at every individual piece of your budget, every line item, every expense you have and see what you can cut. Some of it, you really don’t need. Do you need a paid subscription to AmishDatingConnect.com?
If you need to keep an expense, you can just try to lower it. For example, cable companies regularly have promotions for new customers that will lower the cost to $19 a month for high-speed internet. Now, if you call up the cable company and ask for the retention department, tell them you are going to switch to a dish. Ask, “What are you willing to do to keep my business?” There is an incredibly good chance that they will offer you the same deal–$20 a month–for the next three or four months. Poof, you save money. You can call every bill you’ve got to ask them how you can save money.
I called my electric company and my gas company to get on their budget plans. This doesn’t actually save me money but it does provide me with a consistent budget all year long, so instead of getting a $300 gas bill in the depths of January’s hellish cold, I pay $60 a month. It is averaged out over the course of the year. It feels like less and it lets me get a stable budget. Other bills are similar. You can call your credit card companies and tell them everything you take your business to another card that gave you an offer of 5% under what ever you are currently paying. It doesn’t even have to be a real offer. Just call them up and say you are going to transfer your balance away unless they can meet or beat the new interest rate. If you’ve been making on-time payments for any length of time–even six months or a year–they’re going to lower the interest rate business, no problem. Start out by asking for at least a 5% drop. In fact, demand no more than 9.9%.
Once you’ve gone through every single one of your bills, you’ll be surprised by how much money you’re no longer paying, whether it’s because somebody lowered the bill for you or you scratched it off the list completely.
