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While IRS reports progress on cracking down on tax-related ID fraud, consumers and businesses warned to watch out for con artists who want more of your data.
Susan Tompor, Detroit Free Press
Owing $500 or $1,000 for your federal income taxes is one thing. But what if you owe far more than that — and there’s absolutely no chance that you can pay the amount you owe by the tax deadline?
Fortunately, you’ve got options. But one of them isn’t sticking your head in the sand.
We’ve all read about the wild tax woes involving some big-name celebrities — including heavy-metal icon Ozzy Osbourne and his TV celebrity wife, Sharon, country singer Willie Nelson, and boxer Floyd Mayweather Jr., whose nickname is Money.
But plenty of everyday people have their tax troubles, too.
Roughly 8.26 million new federal income tax accounts went into delinquent collection status in fiscal 2017 after a return was filed without paying the taxes due, according to data from the Internal Revenue Service. Relatively speaking, it’s a fraction — nearly 3.4% — of all 245 million returns filed in 2017, including individuals and businesses.
But you don’t want to go to that extreme. Figure out a way to file a tax return by this year’s April 17 deadline, pay as much as you can afford now to reduce the cost of additional interest and penalties, and work out a payment strategy.
Run the numbers before choosing not to pay
For some families, it can be as simple as running the numbers to review what works. Take someone who owes $2,000 in federal income taxes and doesn’t have all that money now but might in six months.
The cost would be about $2,090 if a return is filed now and the payment is made by Oct. 15 — including $90 in failure-to-pay penalties and interest, according to The Tax Institute at HR Block.
But the cost goes up to $2,230 if you file now and pay by credit card, thanks to interest and convenience fees. In this example, the credit card is assumed to have an 18% annual percentage rate. And this assumes you’d pay the bill in six months — the cost goes up the longer you take to pay.
The most expensive option is doing nothing. Don’t file a return, don’t file an extension now and then don’t pay any of the taxes due until Oct. 15. Then, the cost hits $2,600 — including both the IRS failure-to-file and failure-to-pay penalties and interest, according to The Tax Institute at HR Block.
“The bottom line on taxes is that you should file regardless of payment,” said Luis D. Garcia, a spokesperson for the IRS In Detroit.
“Don’t put it off and don’t engage in magical thinking that it will somehow go away if you ignore it. It won’t, and the penalty will be ten times as much,” Garcia said.
The IRS penalty for failing to file can be as high as 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty can build up to as much as 25% of your unpaid taxes.
By contrast, the failure-to-pay penalty is generally 0.5% per month of your unpaid taxes. It, too, can build up to as much as 25% of unpaid taxes.
If both the late filing and late payment penalties apply, the maximum amount charged for the two penalties is 5% per month. The penalties are in addition to interest charged.
“We’re ready to work out all sorts of payment options but you’ve got to file first,” Garcia said. “Just ask, you’ll be surprised at how many options and plans are available to help you meet your tax obligation.”
The IRS has payment options that are available online. See www.irs.gov/opa.
Why people owe
People end up owing money, instead of getting a tax refund, for many reasons.
“The biggest shocker to my clients is when they are issued a 1099-MISC for non-employee compensation,” said Joseph C. DeGennaro, tax director for Doeren Mayhew in Troy.
Take someone who made $50,000 in the gig economy and assumes they didn’t pay any taxes through quarterly payments during 2017.
If that person is single with no dependents, the “Amount You Owe” on Line 78 of the 1040 form would be a whopping $12,010. (That’s assuming the person takes the standard deduction, as well, and hasn’t tracked appropriate expenses that could be deductible against the $50,000.)
The reason the bill is so high? The person would owe federal income taxes — as well as the appropriate taxes for Social Security and Medicare taxes.
Yet there are other reasons for big tax bills.
This tax season, investors who hold money in mutual funds outside of tax-deferred retirement accounts are seeing significant capital gains distributions after the robust rally on Wall Street.
Or maybe someone sold a business or stock in 2017 and didn’t plan for the tax hit.
Eric Canvasser, a certified public accountant with his own firm in Farmington Hills, Mich., has one client who runs her own business and lost a spouse in 2016. She ended up as a single tax filer owing far more money than expected on the 2017 return.
“When he passed away, her income remained constant,” he said. The widow owed roughly $6,000.
“She was little surprised when I showed her what those numbers were,” Canvasser said.
But she was able to pay it.
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If someone is unable to pay, they need to try to work out their problems early.
“They have to come clean and they have to work with the IRS. Anything else is just going to dig you into a deeper hole,” said Cari Weston, director of taxation for the American Institute of CPAs.
“It’s not something to play with.”
Many times, tax professionals say it has not been as easy to work out a deal with various states, including Michigan, regarding liabilities for state income taxes.
“I felt like they weren’t as taxpayer friendly. They demanded, saying ‘You must, you must,’ ” Weston said. “And the IRS was more, ‘We want to help you do this.’ ”
Some tax professionals say if there’s a limited amount of money, the taxpayer could try to cover the entire state tax bill and then work with the IRS on a payment plan.
Here’s a look at some options regarding a federal income tax bill:
Do you need an extension? You can get an automatic six-month extension to file your tax return by filing Form 4868. Filing an extension helps you avoid a failure to file penalty. Some file for an extension if they don’t have all the appropriate paperwork by April 17. But remember, pay as much of what you owe as you can by April 17 to reduce penalties and interest.
Can you pay by credit card or debit card? It’s a pricey option but one that some with smaller tax bills consider. You’re paying an upfront processing fee that can range from 1.87% to 1.99%. The minimum fees start around $2.50 for small tax payments. And the fees are even higher if you use tax preparation software that has a payment plan that’s built-in with e-filing. The TurboTax option has a processing fee of 2.49%.
On a $2,000 federal tax bill, the processing fee could be nearly $40 to $50.
That’s on top of interest charges. See www.irs.gov/payments. Or the IRS2Go app.
Can you pay in a few months? You might qualify for a short-term payment plan if you can pay within 120 days or less. There is no online set-up fee but you will pay applicable penalties and interest until you pay in full.
You may be able to set up this agreement using the Online Payment Agreement application at www.irs.gov/payments or call 800-829-1040 (individuals) or 800-829-4933 (businesses).
Do you need a couple of years to pay off the tax debt? If you owe a great deal of money, look into a monthly installment agreement. You’re eligible for a guaranteed installment agreement if the tax you owe isn’t more than $10,000 and you meet other requirements, including agreeing to pay the full amount you owe within three years. You also must be financially unable to pay the liability in full when it’s due.
About 798,000 online installment agreements were established or revised online for individuals and businesses in fiscal 2017, according to the IRS Data Book. That includes short-term extensions.
According to tax experts, it can be a straightforward process to apply for a payment plan online through the IRS website at www.irs.gov/opa. But remember, interest is building even under these installment plans, so you typically want to pay off what you owe as soon as possible.
Even so, don’t agree to any deal that cuts too deeply into your budget. Make sure that you can consistently make the payments and not end up in default.
“Commit to the very minimum payment and then you can always pay more,” Weston said.
Owe more than $10,000? There’s a six-year installment agreement for those who owe more than $10,000 through $50,000. You can apply online for a IRS payment agreement if your balance due isn’t more than $50,000.
The system for completing an online payment agreement is available during specific hours — 6 a.m. to 12:30 a.m. EDT on weekdays, 6 a.m. to 10 p.m. EDT on Saturday and 6 p.m. to 12 a.m. EDT on Sunday.
By applying online, you can reduce the cost of a user fee for the program.
User fees vary and range as low as $31 for setting up an online payment agreement and making payments by direct debit. But fees can go as high as $225 if you don’t set up the agreement online and don’t make your payments by direct debit. You also may qualify for a reduced fee if your income is below a certain level.
Owe more than $50,000? If you owe between $50,000 and $100,000 for an individual return, you may be able to work out a payment plan for up to seven years. Filing for such an installment plan can help you avoid accruing even more interest and penalties, prevent problems in obtaining a loan in the future, and avoid seeing the IRS take hold of your future tax refunds. It will also prevent the IRS from seizing your assets.
See Form 9465, the Installment Agreement Request for details on such programs.
Want the IRS to forgive some or all of your debt?
Don’t bet on it. To be sure, a taxpayer who is in financial trouble can request that the federal government that settle a tax liability for payment of less than the full amount owed.
In fiscal 2017, taxpayers proposed 62,000 offers in compromise to settle tax debts for less than the full amount owed, according to the IRS 2017 Data Book.
But the IRS accepted only 25,000 offers, amounting to almost $256 million, during the year.
The IRS warns: “Absent special circumstances, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement.”
It’s best not to jump on tax advice based on a late-night TV commercial. Many may claim they can reduce your tax debt or sign you up a tax relief program once you pay an upfront fee. But it’s often a great way to dig an even deeper hole and go further in debt.
Contact Susan Tompor: email@example.com or 313-222-8876. Follow Susan on Twitter @Tompor.