Gregory Burke

Ask the Experts: How to pay taxes in installments

Published: Wednesday, Sep. 12, 2012 - 12:00 am | Page 7B

Paying back taxes can be a daunting, difficult task. This week, Gregory Burke, a Sacramento CPA and former IRS auditor, helps readers figure out the process.

As one of our "Ask the Experts" contributors, Burke answers questions on federal taxes on sacbee.com's Personal Finance blog. To see more of his IRS advice or that of our other local experts on state taxes, investing, personal finances, jobs or wills/trusts, go to: www.sacbee.com/personalfinanceblog.

We are having a very difficult time trying to pay back taxes owed to the IRS, currently about $12,888. I made arrangements with the IRS and am making $100-per-month payments for six years for the 2010 amount, which is $4,200. For 2011, I owe $8,600 and the IRS wants to double the monthly payment, which we cannot afford. I have used everything available in paying off other bills. My wife can take out $5,000 from her 401(k). Is there any way the IRS could take that amount and call it even?

It is possible to settle taxes owed to the IRS for prior years through an "Offer in Compromise" agreement. The IRS may settle tax debts if there is either doubt as to liability or collectibility.

You will find step-by-step instructions for submitting an Offer in Compromise in IRS Form 656-B. Details are on the IRS website, www.irs.gov. There's also a video at www.irsvideos.gov (Type "Form 656" in the search box.)

As part of the application process, you will need to provide extensive information regarding your assets, liabilities, income and expenses. You must also pay a nonrefundable $150 fee and an initial payment toward the tax debt.

Many people seek professional help in preparing Offers in Compromise. Be wary of "offer mills" that advertise "too-good-to-be-true" results. It is best to find a tax professional who has experience in preparing Offers in Compromise and can help you work through the IRS process.

I took a hardship withdrawal from my 401(k) in 2012 to pay my mortgage. I did not prepay any tax or penalty. I understand that when I file my 2012 tax return, I have to pay tax and penalty on the amount I withdrew. I may not have enough money to pay. What are my options?

If you cannot pay the entire balance due when filing your return, you have two options.

The first option, assuming you can make monthly payments, is to request "installment payment" agreements with the IRS and the state Franchise Tax Board.

Use IRS Form 9465 and FTB Form 3567 to request installment payment plans. You can find the forms on the respective websites: www.irs.gov and www.ftb.ca.gov.

If the federal balance due is under $25,000 and the monthly payment will allow the debt to be paid within 36 months, the IRS will automatically approve the request. Similarly, the state will generally approve requests if the debt is less than $10,000 and can be paid within 60 months.

You will have to pay interest and late payment penalties, but you won't be subject to aggressive collection activities as long as you keep current with monthly payments.

There are processing fees that must be paid when requesting a payment plan. The federal fee is $105 if payments will be made by check, money order or credit card; $52 if paid by electronic transfer. The state fee is $34.

If you don't have enough income to make monthly payments and you don't have assets that can be borrowed against or sold to raise cash, you may want to consider the second option: making an "Offer in Compromise" to the IRS and FTB to settle your debts.

See my answer above on how to make an IRS settlement offer. For state taxes, use FTB Form 4905 (Offers in Compromise for Individuals). found at www.ftb.ca.gov.

– Compiled by Claudia Buck

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