Archive for the ‘Tax Collections’ Category

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.

Happy 100th Birthday Federal Income Tax?!

Originally published in the Cedar Street Times

October 18, 2013

On October 3rd, our nation’s federal income tax turned 100 years old.  Usually lots of people show up for anyone turning 100, but sadly, for the federal income tax, there was no grand party.  In fact, most of its closest friends – the 106,000 employees of the Internal Revenue Service were at home due to the government shutdown!  Americans celebrating the federal income tax would be lackluster at best – maybe on par with the excitement of throwing a party for your boss.  But let us at least pay some tribute to this system and perhaps gain a little more perspective

The roots of the income tax go deeper than 1913.  Abraham Lincoln set up the first income tax in 1862 in order to finance the Union efforts in the Civil War, and he established a position called “Commissioner of Internal Revenue” to handle this job.  The tax was a temporary tax and expired in 1872.  It provided about 21 percent of the cost of the war efforts, and about 10 percent of Union households were touched by the income tax.

Tariffs and excise taxes were the typical means of generating most revenue before and after the Civil War, but the country was looking for a better system.  In 1894, Congress tried to reenact the income tax but it was shot down by the Supreme Court which declared it unconstitutional.  The Constitution basically said that direct taxes had to be apportioned to the states based on relative population.  An income tax clearly violated that since it was not divided out based on population but different to each person based on each individual’s income.

During the early 1900s, there was a growing movement by the people in support of a permanent income tax that would mainly be levied on wealthy individuals.  Tariffs and excise taxes hit low and middle income people squarely on the shoulders since a much higher percentage of their total income was taxed as a result.  The only way to have an income tax, however, was by laying the groundwork to make it constitutional via an amendment.

Three main campaign issues defined the election of 1912: monopolies, women’s suffrage, and tariffs.  Woodrow Wilson wanted to break up monopolies, he dodged women’s suffrage by saying it should be decided at the state level, and he wanted revenue reform.  He was elected with nearly 82 percent of the Electoral College vote and the next year the 16th amendment was ratified which states, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

I have a facsimile on my office wall of the first income tax return in 1913.  It was three pages long with one page of instructions (2012 instructions were 214 pages by comparison).  Adjusted for inflation in today’s dollars, if you made less than $70,000 as a single individual, you had no income tax liability.  If you made between 70,000 and $465,000, you were assessed a one percent income tax!  The top bracket was only seven percent, and assessed to those filers making over $11.6 million in today’s dollars.

Compare that to 2013…our bottom tax bracket is 10 percent assessed on single individuals making between $10,000 and $18,925, and our top bracket is 39.6 percent assessed on individuals making over $400,000.  In fairness to history, after the first three years tax rates started rising and they skyrocketed during World War I when the top bracket hit 77 percent on earnings over $15 million in today’s dollars.

Since 1975, there have been dozens of court cases from crafty people trying to figure out how they can get out paying income taxes.  The cases involve everything from claims that ratification procedures of the sixteenth amendment in certain states were not properly followed right down to claims that differences in punctuation and capitalization marks in versions ratified by the various states means the ratification was null and void. None of the ratification cases have ever been victorious and the courts have ruled ratification arguments are now frivolous or fraudulent.

The federal income tax is quite resilient, and has spent its entire life being pulled in many directions.   I am sure it will soon get over any hurt feelings from not having a 100th birthday party as did the Department of Labor, the U.S. Forest Service, and the National Archives.  Maybe on its 200th birthday it will get a cake.

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

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Paying the IRS: Installment Agreements

Originally published in the Pacific Grove Hometown Bulletin

May 2, 2012

Hopefully by now you have filed your tax returns.  If you decided to file for an extension, that is fine, but keep in mind you have not extended your time to pay any tax owed.  That was still due on April 17th.  Filing the extension was key, however, because a late filing penalty is assessed at five percent of the balance owed for every month the return is late (capped at 25 percent).  If you do not owe taxes, you are fine, even if you did not file an extension, since the penalty is based on the balance owed.

If you did file your return and you could not come up with enough cash to pay the IRS, you have payment options.  If you feel you can pay the IRS within 120 days, call 1-800-829-1040 and advise them of this fact and they will not harass you for payment and you can avoid the cost of setting up an installment agreement.

If you need to make payments over time by setting up an installment agreement, the IRS will generally allow this quite easily if your balance is below $25,000, you can pay it off in seven years, and you are in good standing with the IRS.  This is accomplished by filing Form 9465.  There is a $105 fee to set up an installment agreement, unless you elect electronic payment withdrawals from your bank – this cuts the fee down to $52.  Interest accrues at a variable rate which changes every quarter (currently three percent per annum) and late payment penalties may also still be assessed (1/2 percent per month, or portion thereof – approximately six percent per annum).  Other minor penalties may apply also.

In practice, I have never had an installment agreement under $25,000 turned down or even questioned by offering a monthly payment amount equal to the starting principal balance divided by 60. If you owe over $25,000, you have to provide detailed information about your financial situation through additional forms before an installment agreement is granted.  With an installment agreement in place, you avoid harassing letters and other possible collection actions such as levying bank accounts, garnishment of wages, forcing the sale of assets, etc.  (Forcing the sale of assets is rare unless you owe at least $100,000…and are obstinate!)

If you have large tax debts that may be difficult or impossible to pay there are other less friendly avenues such as offers in compromise, or even bankruptcy filing if the tax debts are at least three years old.

California has a less generous installment agreement option, but can be requested by filing FTB Form 3567.

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

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.