Questions for the Tax Lady: January 17th, 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!

Question: Did the IRS really extend the deadline to file this year? Does it apply to all taxpayers, or only in Washington D.C.?

Answer: Yes, the IRS did in fact extend the filing deadline until April 18, 2011. The reason for the extension is Washington DC observes Emancipation Day, which falls on April 15 this year. By law, all holidays Washington DC observes impact tax deadlines the same way federal holidays do: so all taxpayers have three extra days to file.

If you file for a 6 month extension, you will have until October 17, 2011 to file.

But remember, three extra days is no excuse to procrastinate! Get your taxes prepared and filed in a timely manner to avoid that last minute stress, and the possibility of missing the deadline!

Question: I found out I owe the IRS about $3,500 from last year. Do I have to pay it all at once or can I sign up for a payment plan?

Answer: Since your tax debt is relatively small – although it probably doesn’t feel very small to you! – you should be able to get a streamlined installment agreement. This allows you to repay your debt in monthly payments, instead of in a lump sum. You will still pay interest and penalties, so the sooner you pay it off, the smaller the financial impact will be for you.

To request an installment agreement, you can use the IRS’s online application here.

Questions for the Tax Lady: September 27th, 2010

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. I will do my best to get an answer for you!

Question #1: Taxes are not our only debt, we lost our home, cars and have several medical bills, and collections along with tax levies coming all the time. Are taxes dischargeable in bankruptcy, we have to file chapter 7 anyway, and our attorney thinks he get our largest tax debt included since it is over 4 years old now.

Answer: I’m so sorry to hear of your difficulties. While not for everyone, bankruptcy can be a lifesaver for those drowning in debts.

To answer your question, some tax debts can be discharged through a Chapter 7 bankruptcy filing. There are five criteria for determining if the federal income tax debt is dischargeable:

1. The due date for filing the tax return associated with the tax debt is at least three years ago.
2. The tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old. (This is one that trips people up. Make sure you know when the IRS officially assessed the debt.)
4. The tax return was not fraudulent.
5. The taxpayer is not guilty of tax evasion.

If your bankruptcy attorney is advising you to include your tax debts in the bankruptcy filing, and you are confident you meet the above criteria, then I would trust your attorney. If you are not sure your tax debt meets these requirements, you may request your tax transcripts from the IRS to verify the dates of the debt assessment, the due date of the returns and more.

Question #2: If you missed filing a tax return for two years, can you still get a payment plan from the IRS?

Answer: The IRS offers payment plans called Installment Agreements for people who are unable to pay their entire tax bill at once. However, there are some sticking points:

1. The IRS will not enter into an Installment Agreement with you until you are 100% compliant in your tax filings. Before you apply for an Installment Agreement, find a qualified tax professional to help you prepare and file the missing tax returns.

2. The IRS bases the amount of your monthly payment on your ability to pay, so be prepared for a much higher payment amount than you might hope for. The IRS has very specific guidelines for determining how much you should be paying them each month, and many taxpayers suffer from a little sticker shock when they see how much the IRS expects.

Once you’ve filed the missing returns, and have your financial information handy, fill out Form 9465 Installment Agreement Request, or visit www.irs.gov and click on I Need To… Set Up a Payment Plan from their menu options.

Letter to Congress, U.S. Treasury, and the IRS

Last week, I sent an open letter to Congress, the U.S. Treasury, and the IRS identifying a problem that can be easily fixed and beneficial to taxpayers and the IRS. Here is a press release about the letter and including an actual photocopy.

Specifically, the problem was that the IRS requires a complete financial disclosure from all taxpayers who owe in excess of $25,000.00. The complete financial disclosure includes giving the IRS extremely personal information and private financial information. The disclosure is required even if you arrange to fully pay the amount owed within five (5) years, which is agreeing to a substantial payment. The disclosure also requires substantiation of all financial information claimed. This includes providing copies of all current financial records, such as bank statements, paycheck stubs, proof of payment for monthly expenses (i.e. medical expenses, child care, etc.). As you can imagine, such a system acts as a barrier for many taxpayers to get a fair resolution. In fact, it frightens many from even attempting to address their IRS tax debt.

Congress, the U.S. Treasury, and the IRS can work together to create a more efficient and effective program. Simply raising the bar to when the IRS requires a complete financial disclosure will go a long ways towards creating that program.

Expensive Tax Mistakes To Avoid

CNN.com has added a helpful article with advice on some expensive tax mistakes to avoid when preparing your tax returns this year. Some of their advice includes: avoid paying taxes with a credit card, avoiding refund anticipation loans, setting up an installment agreement, and paying on time. You can read the full article by clicking here.