Eleventh Hour Tax Advice

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, April 16, 2000.

Copyright İ 2000  Robert L. Sommers, all rights reserved.

Eleventh Hour Tax Advice

It is Sunday, you’re resigned to preparing your taxes and guess what? You’re missing a tax form. The library, post office, and IRS are closed. Don’t despair. Go to the Tax Prophet’s March 2000 Hot Topics (www.taxprophet.com/hot/mar2000.htm ) which contains websites for downloading federal and state tax forms and instructions, plus other key tax resources on the Web.

File for An Extension:

If you can’t complete your return, download Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) and file it by midnight Monday. IRS will then grant you a four-month automatic extension to August 15, 2000.

Note: California does not require an extension form, but you must pay 100% of any taxes due to avoid penalties. Use FTB Form 3519 to make the additional California payment. California gives you until October 16, 2000, to file your return.

File Your Return:

Make sure you file your return on time (or file for an extension), paying at least 90% of the taxes owed. The penalty for failing to file a return is 5% per month of the taxes due for a maximum of 5 months (25% in total), which is ten times greater than the 0.5% per-month penalty for failure to pay (25% in total). The lesson: Always file your return, whether or not you can pay the taxes.

Home Equity Loan:

If you owe IRS, there are several ways to pay them. The best solution is to borrow against your first or second home under the home-equity loan rules, then pay your taxes with the proceeds. Not only do you get the tax authorities off your back and avoid penalties, the loan interest is deductible, provided the aggregate loan amount owed is $100,000 or less.

Note: Another important use for a home-equity loan is to convert non-deductible interest payments (credit cards, auto loans, personal loans) into tax-deductible interest payments.

Credit Card vs. Installment Agreement

If you cannot obtain a home-equity loan, consider entering into an installment arrangement with IRS (provided you qualify and pay the $43 fee) or paying by credit card (less favorable). Use of a credit card could be expensive, considering the 1-3% fee, plus 14%-18% annual interest on the unpaid balance. In contrast, IRS penalties and interest will amount to roughly 9% on any unpaid balance. Further, IRS applies payments first to principal, then penalties and then interest (the opposite of a typical loan), thereby reducing the principal which, in turn, reduces the interest.

If you filed and paid your taxes without an installment agreement during the previous 5 years, you are entitled to pay the balance in installments as long as your balance is under $10,000 by April 15th and the tax will be fully paid in 3 years. IRS will negotiate an installment agreement when the tax is greater than $10,000, provided the taxpayer does not have sufficient assets to readily pay the tax.

Use a credit card if: (1) You want to earn bonus points or mileage offered by your credit card, the service fee is low and you plan to pay the balance by the next statement; (2) you cannot qualify for an installment arrangement with IRS; (3) you want IRS off your back and out of your life.

Offer in Compromise

If you owe IRS current or back taxes and do not earn enough income or own sufficient assets which can be sold to pay them, consider an offer in compromise (Form 656). IRS is now required to process all submitted offers, with two exceptions: (1) When the taxpayer is currently in bankruptcy; or (2) If the taxpayer has not filed all required tax returns.

IRS is permitted to accept an offer when there is either: (1) doubt as to liability (the taxpayer may not owe any tax) or (2) doubt as to collectibility (the taxpayer does not have resources to pay the taxes ), which occurs in about 99% of all offers. With this latter alternative, be prepared to prove that you cannot pay your tax debt.

IRS also considers equity, fairness and hardship when considering an offer. IRS must cooperate with taxpayers who are trying in good faith to meet their tax obligations. IRS may authorize eliminating penalties and interest during the time a taxpayer's liability is under consideration.

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All contents copyright İ 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.