Questions for the Tax Lady: April 4th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

1. I filed for bankruptcy and my debts were discharged, but I am still getting collection letters from the IRS? What should I do?

Answer: The first thing you should do is read the letters. Make sure they are referring to debts that were in fact discharged by the bankruptcy filing. Not all tax debts are dischargeable and not every chapter filing allows you to discharge tax debt. So, reread your court documents and official discharge order.

Next, make sure the letters you are receiving are actually collection letters from the IRS. The IRS sends a variety of notices, and even a bankruptcy discharge will not remove some liens. If the letter is a demand for payment, or notice of collection activity, then you need to call the IRS to figure out why you are getting these notices.

It could be that the IRS is slow to update their systems. Or, you might need to send them a copy of the discharge order. If you call the IRS and still don’t get anywhere, call your bankruptcy attorney and see if they can get to the bottom of it.

2. Roni, I owe the IRS over $22,000 this year because I withdrew from my retirement account early to prevent foreclosing on my home. Is there any way to lessen this penalty?

Answer: The IRS has some funky rules to help those in financial hardship. If you house is foreclosed, you can exclude the canceled debt income, up to $2 million. But there is no relief for people who had to cash out their investments and retirement savings to avoid foreclosure.

That being said, you do have some options for resolving your tax debt. If you have the ability to make monthly payments, you should be able to get a Streamlined Installment Agreement. If you do not have any ability to make payments, you might try to get placed on the Currently Not Collectible status. This does not remove your debt, but does give you a “tax timeout” where you will be safe from enforced collections while you are experiencing financial hardship.

Common Questions About Estimated Quarterly Tax Payments

The June 15^th deadline for making estimated payments to the IRS is only a few days away. To help confused taxpayers, the RDTC Tax Help Blog has posted an entry with answers to the 10 most common questions about quarterly tax payments. I have included a few of questions and answers below, but you can find the full list at RDTC.com.

What federal taxes am I required to include in my quarterly payment?

In your estimated quarterly payment you must pay your federal income tax, as well as Social Security and Medicare taxes, which are known collectively as the self-employment tax. The amount of tax you are required to pay will depend on your income level.

When are my quarterly tax payments due?

The federal due dates for estimated tax payments are April 15, June 15, September 15, and January 15. However, if one of these dates falls on a weekend or legal holiday then the associated payment will be due the following business day.

What forms do I need to use to file my payment?

To file your quarterly payment you will need to complete IRS Form 1040-ES. If you cannot download it online, then you can get a copy at a local IRS office or by calling 800-TAX-FORM.

My business is setup as a partnership; will I still need to make estimated tax payments?

Yes, you and your partner will both need to make quarterly payments unless you are paying yourself wages and are having the necessary taxes withheld from your paychecks.