It’s April 15th the end of tax season. Somehow, don’t ask me how, I made it through another one.
So your return is done, and you owe more money that you can afford to pay today. What can you do?
Crying about it probably isn’t the answer. Sticking your head in the sand and trying to forget about it won’t handle the problem either.
Not doing something will only make it worse. So what can you do?
If you don’t file your return today, you should file an extension, This will give you an additional six months to file the return.
But if your return has been completed and you can’t pay the entire bill, then you should file it and pay what you can. If this means that you can cover the state, at least that takes care of one agency that we won’t have to worry about later.
If the amount owed at the Federal Level is less than $25K, we can request a payment plan. The Service will give you up to 72 months to pay the bill in full without charging interest.
The reason they do these payment plans with such reasonable terms is that most people don’t honor the agreements. Most will make a few payments and then come up with a reason to not follow through.
What happens then is the normal process of IRS Collection nightmares. You’ve all heard the late night insomniac theater commercials where someone owed the Service $50K, has paid them $40K, and the Service says that they still owe $35K.
Have you ever wondered how that happens? Is it even legal?
It most certainly is. The government writes the laws, and has made sure to write them in their favor rather than yours.
All federal tax liabilities can be broken down into three parts which are Principal, Penalty and Interest. So let’s set up a scenario where Joanne B. Owner owes $50K on her income taxes; $35K is Principal, 10K in Penalties, and another $5K in Interest.
Joanne has a good month at her business and decides to cut a check to the IRS for $5K. The question now becomes how is that check going to be applied on the three different portions of the debt?
A reasonable person would assume that the $5K will be applied to principal. Isn’t that what they taught all of us back in B School?
But the IRS, by law if not instructed how to apply the payment, has the right to apply it to their benefit rather than the taxpayer’s. In this instance, it would be applied to interest only.
This is how the insomniac theater cases where the individual owed $50K, paid $40K, and still owes another $35K happen. If all or the majority of your payments are applied to interest and/or penalty only, then you never get at the principal, and the debt continues to grow.
The problem on the payment plans is that you can’t instruct the IRS how to apply the payments. Even if you direct them in the memo section of your check to apply the payment to principal only, they aren’t required to follow your instructions and generally won’t.
I’m certainly not telling you to not set up a payment plan. Doing one is the only way to make sure the IRS doesn’t ramp up their collection actions. But do so knowing that it’s only a temporary thing, like putting a Bandaid on a wound.
As soon as you can put the money together, you should pay off your tax debt with all possible haste.
Let me leave you with this…
Taking care of this year’s balance is only part of the job. Making sure that you never get into this situation again is just as important.
Your return probably came with estimated tax deposits. These are quarterly payments based on the prior year’s income tax liability that will make sure you at least deposit the full amount of last year’s income tax liability.
It certainly doesn’t guarantee that you won’t be forced to pay income taxes the following year. If you make more money, you probably won’t get a refund. But these estimates should at least get you close.
Adjusting the withholding on your payroll is generally an easier way to solve the problem. It’s a way of saving for a larger bill in smaller increments.
You can instruct whoever does your payroll to withhold and deposit additional federal and state taxes. At that point, hopefully, you won’t pay an estimated tax penalty next year or end up with a huge bill.
It should also be noted that if you’re planning on making your quarterly estimated tax deposits, then the first quarter deposit is due today. Also, if you’re making tax deposits for the Illinois Pass Through Entity Tax Credit, they’re also due today.
If you have questions, please let us know.
We’re all going to get through this. Let’s get through it together.
As an inducement, we’re offering 33% off your first six months of bookkeeping and / or the first three months of electronic payroll services on a complimentary basis. In order to claim this benefit, please click on the appropriate button below and provide your contact information. We’d love to help.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.