Originally published on Forbes.com Apr 12th, 2013
Back in the good old days, when money actually earned interest, there was this sense, in certain circles, that people bragging about their refunds were chumps. Not so much anymore. In late 2011, my ship finally came in. I freely squandered most of it setting up a trust for my son’s looming college and paying off the mortgages on my two condos (Someday I’ll tell the story of how I became an accidental landlord), but held back the money I would be needing in mid-April. I must have fallen into a mental time warp thinking that I would actually be able to earn something noticeable in a little over a quarter. It was disgusting how little it was. At any rate, that disappointment must be nothing as compared to someone who has a decent year, yet somehow manages to not have the money next April to pay the balance due. It happens.
How Does It Happen ?
Someone with a business organized as a flow-through can have a highly profitable year and then have a disastrous first quarter. More commonly people who come up short in April are people who failed to organize their lives to live on their after tax income. Over the years, I have speculated that this might be the result of underlying psychological problems. I have also noted that people in counseling fields tend to not be the greatest financial thinkers you will ever run into, which gave me the brilliant idea of financial planners collaborating with therapists. It turns out, of course, that other people have thought of that, although there are significant problems in making it work as this article indicates.
Cut It Out It’s April 12th What Do I Do ?
The temptation is to not file until you can put together the money to pay your balance due. There are several reasons why this is a bad idea. The most obvious one is that the late file penalties will make it even more challenging for you to work your way out of the hole that you find yourself in. A subtler and, perhaps, more important reason is that, if you fail to file, there will be no immediate consequence. There will not be a team of IRS agents surrounding your house. You will find yourself sliding further into non-compliance and when the consequences do come they will be much more severe.
What you can do is file and request a payment plan. If you owe less than $50,000 you apply for a payment plan on-line. The fact that there is an on-line option should give you comfort that you are not the first person that this has ever happened to. If you owe $50,000 or more you will need to file Form 9465 and will also need Form 433-F. There is a good chance that you will also need some help.
Don’t expect that your regular tax preparer will be familiar with these matters. Collections is a different world from determining the correct tax. You may have to do a little networking to find somebody in your community with a good reputation who is experienced in these matters. In the mean time, start gathering the information required by Form 433-F, which is fairly elaborate.
Consider Filing Separately Even If Total Tax Is Higher
This seems counter-intuitive but if you don’t have the money to pay the balance due on a joint return, consider filing separately even if the total due is higher. You can amend from separate filing to a joint return, but filing a joint return is an irrevocable election. A joint return creates joint and several liability, which means that they can collect the entire balance due from either spouse. If you are not paying your balance due timely, you are entering into a different world where the amount of the tax may turn out to be of merely academic interest. Collections is all about ability to pay.
I’d like to give you some sort of pithy comment to make to people who ask you whether you have received your refund yet and what you are spending it on, but nothing is coming to mind. Maybe one of my regular commenters will come up with something.
You can follow me on twitter @peterreillycpa.