This tax season has flown by. For those of you still needing to file, you have until midnight next Tuesday April 17th, 2018. As always, I want to offer some last-minute tips for you.
You Can Still Reduce Your Tax Bill
If you’ve been waiting to file because you know you will owe money, you still have a chance to reduce your tax bill. If you qualify, you can contribute to a traditional IRA and/or an HSA. You reduce your taxable income by $5,500 (or $6,500 if you’re 50 or older) by maxing out a traditional IRA. You can reduce your income by $6,750 if you have a family HSA or $3,400 if you have an individual plan. You can add $1000 to your HSA contributions if you’re 55 over. Depending on your marginal tax bracket this can save you a couple of thousand dollars.
Similarly, if you’re self-employed you can still open and fund an SEP IRA before the deadline. This deduction can get you the most bang for your buck because you can contribute the lesser of 25% of compensation or $54,000. You get a business deduction for the contributions you make to your employees accounts, and you can deduct 20% of your net earning for contributions to your own account.
Understand What You’re Signing
I know it’s tempting to sign the return your preparer has completed without reviewing it. Don’t do that. Even if someone else prepares the return, you are ultimately responsible for it. So take the time to understand your income and deductions for 2016. For an overview on how returns work, you can check out my previous post regarding what you need to know.
File on Time
If you owe money and you don’t file on time, you may face a steep penalty. Make the return a priority so you can avoid the failure-to-file penalty and any interest that’s associated with the balance. If you don’t think you’ll make it, you can file Form 4868 to request an extension.
You should also keep in mind that this deadline only applies to you if you owe money on your tax return. If you are due a refund, you have three years from the due date, including extensions, or two years from when tax is paid, to file your return and collect your money. However, the longer you wait, the longer you give the IRS an interest free loan. So file as soon as you can.
What to Do if You Can’t Pay the Balance
You may owe more on your tax return than you can afford to repay. That’s okay.
If you find yourself with income-tax debt, take comfort in knowing that you aren’t alone. I used to deal with people on a daily basis that owed the IRS money — from as little as $10,000 to more than $1,000,000.
There are plenty of options in order to resolve your tax debt. Here are the three most common:
1. Installment Agreements
The first approach involves paying the IRS in installments. Under the IRS’ Fresh Start initiative, individual taxpayers that owe less than $50,000 can easily set up a payment plan, if the taxpayer pays his or her debt in full within 72 months (6 years). You can request the agreement online or mail in Form 9465 to a service center. Heads up: it may take a while for an installment agreement requested through the mail to be set up, as the service centers are really behind.
If you need longer than 72 months to pay your debt or you owe more than $50,000 the IRS will request a Collection Information Statement (Form 433-A or Form 433-F). These forms provide an in-depth analysis of your assets, as well as your income and expenses to help determine what you can pay on a regular basis. For example, if the financial statement shows that you can only afford $400 a month after you’ve paid your necessary expenses, that will be the amount of your installment agreement. These financial statements also play an important role in the other resolutions you may obtain.
2. Currently-Not-Collectible Status
If your financial statement shows that your expenses outweigh your income, and you don’t have assets that can pay your debt in full, then you qualify for Current-Not-Collectible (CNC) status. In this resolution, you don’t have to pay anything towards your debt. It’s like a student loan forbearance; you don’t have to pay on the debt but interest and penalties continue to accrue. The IRS may also review your account in a year or two to see if your financial situation has improved to the point where you can make monthly payments. However, it’s possible to remain in currently-not-collectible for the entire period the IRS has to collect the debt — the collection statute expiration date (CSED) which is usually 10 years from the date the tax is assessed (barring any extension of the statute). For more information on CNC, see Internal Revenue Manual 5.16.1.
3. Offer in Compromise
The last resolution I want to cover is the offer in compromise. With this agreement, you pay the IRS only a percentage of what you owe. Once you pay that amount, the rest of your debt is forgiven. This type of resolution is the most attractive of all because you pay less than you owe and have more finality than you would with CNC.
Unfortunately it’s not as easy as calling the IRS and offering whatever you want. You have to fill out a financial statement: this time a 433-A (OIC). In addition, you have to complete Form 656, which outlines your offer amount and why you think the offer should be accepted. The offer amount is based on your disposable income and equity in assets. Lately, it has taken a long time to get the offers processed. However, if you think you qualify, it can be a great way to get a fresh start.
These are just three ways to resolve your debt. You can also pursue other options like audit reconsideration, penalty abatement and innocent/injured spouse. I will cover these resolutions in later posts.
I know you may be anxious during these last few days before the tax deadline if you still have to file. I hope you’ll take some solace in understanding your options and the rules of the game. If you are still overwhelmed and need guidance, it’s best to contact a tax professional — either a lawyer, CPA or Enrolled Agent — who is authorized to represent you before the IRS.