Monday, April 14, 2008

Four (or Five) Steps to Rescue if the Tax Dragon Lurks

For those in serious tax trouble, Andrea Coombes of Yahoo! Finance offers a program to live to fight another tax season. First (and arguably most important), file an accurate tax return. Not filing simply means IRS ire, penalties and interest. Second, if the problem is only temporary in nature, consider whether it makes more sense to pay by credit card (3% IRS fee plus credit card fees) or use Form 9465 for an installment arrangement (6% annual interest plus anywhere from $43 to $105 basic fee (this fee is markedly lower if you use direct debit from your bank account). This installment arrangement works best if you owe less than $10,000 and can pay your taxes within three years. For those with home equity, a home-equity loan would generally be less onerous than owing the IRS. Finally, partial payment or offer in compromise agreements with the IRS may be a last resort if the taxpayer is in truly desparate circumstances or owes massive amounts. Partial payment is the less personally restrictive of the two approaches, but the offer-in-compromise does stop the clock on interest and penalties, according to Bill Wandel of tax-resolution specialists JK Harris.

Hopefully, nobody reading this post will ever have to go beyond step 2 (credit card vs installment arrangement) in paying their taxes. Nevertheless, some (hopefully no more than a few) clients may need the more dramatic home-equity, partial payment or offer-in-compromise approaches.


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