Woe to Those Who Owe, but Find a Way to Pay
Sunday, March 9, 2008
Lee Tanner's troubles with the Internal Revenue Service began with a common mistake. While working for a dot-com, he earned money from the sale of stock options in addition to his salary and didn't have the proper amount of taxes taken out.
"I didn't know any better to correct the problem," said Tanner, 40, who lives in Ashburn.
After three years of not paying enough in taxes, in June 2004 he received a bill from the IRS for $764,000, swollen by interest and penalties. He didn't have the money. His accountant urged him to fight the bill. He did for more than two years, during which the penalties and interest kept adding up. "I was just completely lost," he said.
Most Americans will receive tax refunds this year. But for those who get tax bills instead, figuring out how to deal with the IRS can be stressful and sometimes downright scary.
Local tax lawyers, accountants and financial planners said avoidance is a common reaction among people who owe the IRS and don't have the cash to pay.
"If you don't file, a number of things can happen, and all of them are bad, and often we see clients who don't file because they don't have the money to pay what they owe, " said Burton J. Haynes, a tax attorney in Burke.
For one thing, you incur penalties for not filing a return, anywhere from 5 percent per month of lateness to 25 percent of the amount due.
The IRS can also determine your tax liability on its own in what is called a "substitute for return." You certainly don't want that to happen, Haynes said, because "their estimates of what you owe are almost always way too high."
Even worse, you can actually be prosecuted for willful failure to file.
If you do file a return and have a tax liability, financial planners and other experts said you should do what you can to cobble together the money. Raid your bank accounts and sofa cushions. Cash in those IOUs. Beg relatives for loans.
"Clearly, you find a way to pay the IRS and to pay the state because they're not your favorite creditors," said Barbara Ames, a certified public accountant in Rockville. "Before you deal with the IRS or states, you get a third or second mortgage on your home or ask Mom and Dad for the money."
If you own a home, you can also try to get a home equity line of credit. Or you can apply for some other kind of consumer loan. But planners and tax attorneys said the credit crunch has made this a less viable option as banks tighten their lending standards.