Tax Talk

I Can't Pay My Taxes?

What do you do if you can't pay the IRS the taxes you might owe in April? You have a few options:

You could borrow the money from a bank or your parents. You could put it on a charge card. Or you could borrow the money from the IRS.

Taxpayers have always had the option of paying their taxes over time by entering into an installment agreement with the IRS, a process that has recently been made easier. Historically, you had to prove you couldn't pay the taxes in full before they would agree to a payment plan. Then the IRS realized they could save time and effort and raise more money by making the installment agreement process almost automatic.

If you owe less than $50,000 for personal taxes or $25,000 for business taxes, the process can be done online and is almost automatic. Here is the link that you can use to establish the plan: Online Payment Agreement Application

Part of the process establishes the amount that you need to pay each month. If you do not meet the requirement above you need to complete Form 9465. Here is a link to the form: Paper Payment Agreement Application

You will have to divulge personal information such as your phone number and bank account information. You then submit a down payment and determine how much you will pay each month so you can pay off what you owe within a reasonable period of time.

You can even arrange to have payroll deductions for your back taxes by completing this form: Paying Through Payroll Form

Give long thought to doing this. Do you really want your employer to know that you did not pay your taxes?

Some important points:

1. There is a fee you will be required to pay when you apply for the agreement.
2. I suggest having the IRS automatically deduct it from your checking account each month. This makes sure that the payment is made. The IRS gets really testy if you don't. This could void your installment agreement and cause the IRS to put a lien on your bank account and other property.
3. You are going to be charged interest and penalties on the balance due until it is paid in full. The total interest and penalties can rival charge card interest rates, so make the payments as high as you can afford, and pay extra if you can.
4. You could lose the installment plan if you fail to file and pay your taxes on time in a future year while the payment plan is in effect.

If you cannot pay your federal taxes, you may not be able to pay your state taxes either. The states also have installment plans in place to collect the taxes. However, if all the states are like Massachusetts, the process is difficult to go through. Usually, your state taxes are much less than your federal taxes, so my suggestion is to pay the state taxes in full if you can, and get the installment agreement with the IRS for your federal taxes.

There is a scam going around that can cost you a lot of money. You get an email that looks and feels like it is from the IRS. It says that you are owed a refund of a minor amount of money and are instructed to click the link. The link will ask for your bank account information. Once this information is entered the money will start flowing out of your bank account, not into it.

Think about it. How did the IRS get your email address? Why would they owe you money? Don't forget, the IRS likes to collect money, not pay it out. This is just one of those things that is too good to be true.

The IRS does NOT use email to transact business. They use the phone and US Mail. Should you get one of these emails, delete it immediately. Do not click on any links and do not provide any personal information.

Click this link (to the real IRS Web site) if you want more information.

There is a telephone scam going around too. You get a call from an aggressive "IRS agent" who threatens legal action and even arrest if you do not give him or her bank information. Again, if you respond you will have your checking account cleaned out quickly.

In spite of its reputation, the IRS has specific guidelines that they follow in their dealings with taxpayers. They always send several letters to try to collect taxes that you owe to them. Their phone calls follow a pattern including giving you their name and ID number and they do not get aggressive on the first call.

Even when they get aggressive they still have a procedure to follow and they always try to levy your bank account or wages first.

This scam has been on the news several times. One of my clients was interviewed for the item.

"How long do I keep my financial records?" is a common question. Here are some pointers:

• Financial records (such as bills) that do not effect your tax return can be destroyed as they are paid. Unless you are using your phone, electric, and gas bills as tax deductions, there is no compelling reason to keep them. The major exception to this would be records of home improvements, like the new kitchen or garage.
• You should keep your tax records for a minimum of 4 years and a maximum of 8 years. This would be copies of your W-2s and 1099s, real estate tax bills, business expenses etc. Anything that effects your tax return should be kept. Why the difference in holding period? If the IRS can prove that you have substantially understated your income or taxes, they can go back 7 years from the date of the filing of your return. So a return for 2014 can be audited up to sometime in 2022.
• The vast majority of taxpayers have a W-2, some investment income and a house. The odds of these taxpayers understating their income are remote. Even so, to be on the safe side, keep your records for 8 years.
• You should keep your investment records permanently. However, this does not mean that you need to keep every scrap of paper that comes from your broker, mutual fund or bank. Most mutual funds send out a statement each quarter and then an annual one summarizing all the activity for the year. Once the annual statement arrives, get rid of the quarterly ones. The same goes for brokerage accounts. Nowadays, the mutual fund companies and brokerage firms maintain a record of your investment purchases. BUT these can get lost if you switch brokerage firms and some mutual fund companies don't have the old records if you opened the account a long time ago.

Some other notes:

• Don't have one file where you keep all your records. Separate them by year. Then its easy when its time to shred some records.
• With all the identity theft that is going on today, it is best to shred rather than throw out any records. Definitely do not put financial records that are not shredded in the recycle bin.
• Keep electronic copies of your records. This is easy if you have brokerage accounts or mutual funds. You can download PDFs of your statements and store them on your computer. You can do the same thing with your charge card statements. If you can't get PDFs of your tax returns scan them and the basic records that are needed for your return. Think of all the trees saved by not getting paper copies of everything.
• To guard against a computer crash, be sure to backup your data regularly. Online backup systems work great.