Archive for April, 2016|Monthly archive page

It’s Friday April 15 and Taxes Aren’t Due?

Originally published in the Cedar Street Times

April 15, 2016

If you were (or still are!) a last minute tax return filer, you may have some pleasant news this year – you have three more days to procrastinate!  If you are reading this article on April 15, you might be wondering, “Why is it a normal workday, and my taxes are not due?”

The answer is “Emancipation Day.”  No, we are not talking about emancipation from taxation, but emancipation from slavery.  On April 16, 1862, President Lincoln signed the District of Columbia Compensated Emancipation Act.  This act freed slaves in Washington, D.C., and compensated the prior slave owners for having to give up what was perceived as a financial loss.  This was the only instance were prior slave owners were compensated by the federal government.

The importance of the District of Columbia Compensated Emancipation Act is that it was seen as the first major victory that led to the abolition of slavery.  There had been attempts in the past to accomplish similar feats, but they had all failed.  In fact, when Abraham Lincoln was still a Senator, he tried in 1849 to accomplish this task, but it did not get enough votes to pass the legislature.  Even the decade prior to that saw several failed attempts spearheaded by others.

The District of Columbia Compensated Emancipation Act served as a precursor to the much broader Emancipation Proclamation, nine months later, that freed all slaves in Confederate territories.  Whereas the District of Columbia Compensated Emancipation Act freed about 3,000 enslaved people, the Emancipation Proclamation freed about three million enslaved people!

The Emancipation Proclamation, although often thought of as abolishing slavery, did not actually do so.  It was a wartime power instituted by Lincoln (not voted on by Congress), and it only freed slaves in the Confederate territories that were rebelling.  There were still four non-Confederate states in the South where slavery was legal, even after the Emancipation Proclamation.  It was not until the 13th Amendment to the Constitution was passed, and then ratified on December 6, 1865, that slavery was officially abolished in the United States.

The District of Columbia Compensated Emancipation Act, although celebrated in various capacities since 1862, did not become an official legal holiday in Washington D.C. until 2005.  The first year the tax return filing deadline was changed was for the 2006 tax returns due April 17, 2007.  Since the Emancipation Day Celebration fell on a Monday, and the IRS deadline is always the next business day if the 15th falls on a nonbusiness day, the due date was bumped to Tuesday the 17th.  That year, only Washington D.C. residents received an extra day, and everybody else still had to file on April 16.

Tax year 2011 was the next conflict, and the first time the whole country received an extra day, and is just like this year where April 15 falls on a Friday.  Whereas, the IRS moves their due date to the next business day when April 15 falls on a nonbusiness day, the Emancipation Day celebration moves to the prior business day.  Since April 16 was a Saturday in 2011, as it is now, Emancipation Day moves its celebration to Friday April 15, and then the IRS turns around and says, “Okay, today is a holiday, so we move our due date to the next business day,” which results in Monday the 18th!  Phew!  And fortunately California says, “We will just do whatever the IRS does,” – a rare but appreciated concession in a state that enjoys nonconformity.

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

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Back to Basics – Part XXXVI – Form 9465 Installment Agreement

Originally published in the Cedar Street Times

April 1, 2016

After more than a year, our Back to Basics series has come to an end.  We covered the 1040, all the major Schedules (A, B, C, D, E, and F) and 27 of the most common forms.  To access any articles from the past you can read them on my website atwww.tlongcpa.com/blog .

For our last article, we have some wonderful news!  The IRS recently announced that starting next year, on a three-year trial basis, they are moving to a voluntary income tax system.  You will be asked to pay what you feel is fair and what you can afford, but there will be no requirement to actually pay income tax.

If you haven’t picked up on the date of this publication yet, it is April Fool’s Day;  this utopian ideal will have to sit on the shelf a little longer!  But, if you do find yourself in a situation where you owe more than you can manage to part with by the due date of April 18th, there are some options for you.  Remember that even if you file an extension, the tax is still due by April 18th this year.

The IRS says that if you can pay your balance due in full within four months of the April 18 due date you can simply call them at 800-829-1040 and advise them of this.  You will still have to pay interest (currently 3 percent per annum) and penalties (0.5 percent of the unpaid balance per month – effectively another 6 percent per annum) until paid in full, but you will not have to setup an installment agreement…which is your next option.

If you think you will need more than four months to pay off the balance, then you need to set up an installment agreement to avoid letters threatening actions such as liens, asset seizure, and taking your first-born child.  Well, maybe the first-born child part is a little overdramatic.  Even the concept of seizing assets, although splashed across notices relatively early in the collection phase, is hardly ever a reality, and you would likely have to have a $100K or more tax bill before they would consider taking and selling off your assets.  Wage garnishments and liens do happen more often, however.

An advantage to an installment agreement, is that it cuts the late payment penalty in half – from 0.5 percent per month to 0.25 percent per month.  There is a $120 charge from the IRS to setup and installment agreement, but I recommend you have direct debit setup to take the payment directly out of your bank account each month.  This reduces the fee from $120 down to $52.  It also prevents you from accidentally missing a payment.  If you fail to make a payment, you can be kicked out of the program, and have to reapply, and pay a new fee.  Also, if you have a balance from an old year, and you need to add to it, you generally have to setup a new installment agreement as well.

You can file for an installment agreement using IRS Form 9465.  This can be e-filed with your tax returns, or mailed by paper.  Or, you can set it up online at http://www.irs.gov.  If you owe less than $25,000, you will generally be approved without any hassle, as long as you have a good filing history.  You can take the balance owed and divide by up to 72 months.  I generally recommend that you keep the monthly commitment low so you know you will not fail to be able pay some month and then get kicked out – but go ahead and make extra payments whenever you can to pay it down faster.  Even if you owe up to $50,000, you can still get automatic approval, but you will need to fill out page two of the 9465 that asks a few more financial questions.

If you owe over $50,000, then you also have to send in a 433-F Collection Information Statement.  This has a lot more specific questions about your finances, and is pretty much like providing personal financial statements.

California has a similar installment agreement process, but the amounts and rules differ a bit.  California generally only allows an automatic installment agreement if you have up to $10,000 of unpaid tax liability.  You can go up to $25,000, but you have to show that you have a financial hardship (not by your definition, however!).

The late payment penalties are five percent of the total unpaid tax liability during the first month, and then 0.5 percent each month thereafter until paid in full (capping at 25 percent like the federal does.)  The interest rate is currently the same as the federal three percent rate.  The fee to apply is $34, and you must pay off the balance in less than three years.  I typically recommend just paying the FTB off, if possible, and then only dealing with the IRS on one installment agreement.

The California installment agreement request is made on Form 3567.  You can also fill it out online at ftb.ca.gov by choosing “Installment Agreement” under the “Pay” section.  Your other option is to call the FTB at 800-689-4776.

Finally, there are also options for an offer in compromise, if you clearly will not be able to pay off your tax debts in the future based on your income and certain expenses.  The process is fairly mechanical, and you generally will either qualify or you will not.  It is not like you sit around and negotiate the amount.

Be wary of ads you see on TV or on the radio that talk about getting rid of your tax debts.  A retired collection officer at the IRS of 30 years once told me that many of these groups charge you fees go through all the work to fill out the forms and gather the information whether or not you even have a remote chance of qualifying.  Then you simply get rejected, and you are in a worse position than when you started.  Instead, they could do some preliminary analysis, and not generate a lot of busy work for themselves.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.