Archive for May, 2013

May
31

Don’t Pay This Tax Bill!

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Green piggy bank with tax bill of $1000

 

The email caught me off-guard. It was short and to the point:

Hello again! I have a question for you. We received a letter from the state saying that adjustments need to be made to our income tax return and that we owe $580. It says that if we disagree then we can send them back more information. Do you have any suggestions on what we should do?

My first reaction was to snort and say, “No way!”

My next reaction was concern – concern that this was a new tax client, and first return filed out of the gate they receive a letter from the state demanding money instead of the $350 tax refund they were owed. My third reaction was to groan, knowing that somewhere between the envelope being opened at the state tax office and input into the state computer system, a W-2 had been lost.  How long would this take to fix?

The adjustment notice from the state told the taxpayer that a change had been made in the amount of withholding they had claimed. Because the withholding amount used in the state calculation was less than what was claimed on the return, an anticipated refund was suddenly a balance due.

Quickly checking the math in the notice against my records, it took me about two minutes to find the mistake and verify my fear.

The total state income tax withholding my client claimed on his tax return was $1690.00. The state adjusted that withholding down and used a figure of $830.00.

$1690 – $830 = $860.00

Somewhere, $860 in state withholding had evaporated between the time the return was prepared and the time the state processed the paper. The first thing I did was check the state withholding amounts on the W-2’s of the taxpayer.

Guess what. One of the W-2’s had state income tax withholding of $860.00. It was pretty easy to see that a missing W-2 caused the problem. This is actually a very common mistake at the final processing level. It’s also a common mistake for the taxpayer to forget to include his W-2 with his filed return, or to make a math error when adding his withholding among multiple W-2’s.

This error, although it wasn’t made by the taxpayer, is going to take some time and effort to fix. I’ll write a letter disputing the notice the taxpayer received, explaining the missing W-2 is the reason the withholding was adjusted down. Copies of the W-2 must be attached to the letter to substantiate the case. I’ll make liberal use a bright yellow highlighter to make my point. Once the state receives that information, they will make an adjustment on the case and issue the taxpayer his refund – a few months late.

Hopefully, the adjustments will be agreed to and made without incident. The first correspondence might not do the trick – it may take another letter or a phone call. Remember, they lost the W-2 in the first place!

You should never take any letter from any tax agency, telling you a mistake was made and you owe a bill, as gospel. If you don’t understand the adjustments the tax agency is making to your tax return and your account, contact your tax preparer and discuss your case. Take all letters you’ve received from the tax entity to your preparer.

When you’re dealing with changes being made to your tax return:

  • Make sure you understand completely and agree with the changes being made to your tax return before they are made.
  • Don’t ignore tax correspondence – all letters are sent out on a timed schedule and by law you have certain appeal rights, but if you’ve got 60 days to respond and you don’t decide to answer until Day 90, you’re out of time and too late.   Once Day 60 passes with no contact from you, their changes will become permanent.  If the law says you’ve got 60 days, that means 60 days, not 61.
  • If you choose to ignore the tax agency letters and blow your appeal time frame, the changes will become permanent.
  • If you don’t agree with the proposed changes to your account, present your case in a clear and concise manner. Include copies of the original correspondence to you, your reply, and all exhibits needed to back up your argument.  Keep everything brief but to the point.  They’ve already made the changes. You will have to change their mind.
  • If you prepared your own taxes and don’t know whether you made a mistake or not, make an appointment with a local tax professional and show them the letter. Ask your friends and neighbors for referrals. The best tax experts are often found locally. Personally, I would avoid any of the large tax prep companies and go with a local tax preparer or accountant that comes highly recommended.

Have you ever been on the receiving end of an IRS or state tax agency collection letter?

Were you able to resolve the situation without trading in your first-born?

 

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May
22

Roy: 74, Bankrupt, & It Isn’t His Debt

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Gavel in CourtRoy’s birthday is next week, and instead of spending the day with a fishing pole and a camp chair on the creek bank, he’ll be in federal bankruptcy court. The day of his hearing, Roy will drive two hours from his home into the city, alone.

Roy really doesn’t understand all the fine print on the paperwork, or the lawyer-speak. Roy really doesn’t have a clue how he hit financial rock bottom so quickly after the death of his wife.

What Roy does understand is that in order to keep his home, he must declare bankruptcy and stop any action that could be taken against him on a recent court judgment.

Roy and June were married 55 years. Roy did not handle the finances in the marriage. June did. June passed away after a very short illness, and suddenly Roy was on his own when it came to his money and the bills. If you ask him, Roy can’t tell you the name of his insurance agent.

Gene, Roy’s son, had been helping his mother balance her checking account at times during the previous year. Gene had on-line access to the account, and after having his name added, it was easy for Gene to step in and start paying the bills for his father.  Roy lucked out there.

What Gene wasn’t prepared for was the large stack of paper he found in the old desk in his parent’s living room. Past due credit card bills, collection notices, letters from lawyers, past-due medical bills – there was a lot to sort through,and it took Gene days.

The final picture that emerged was not pretty. Roy owed approximately $20,000 in non-secured debt, in addition to his home mortgage. Of the $20,000 in non-secured debt, $1500 were medical bills in Roy’s name. The remaining debt did not belong to Roy, but it was in his name – and he was getting sued for most of it.

June had taken out credit cards in Roy’s name and given them to her son, Tom, with a promise from Tom that he’d pay the bills. Tom quickly maxed out the cards – and left his mother holding the bag. Tom’s wife bought a bunch of new appliances, and bought Roy a chair, all on credit. When she didn’t pay, they came after Roy for the $5000 balance because his name was on the contract.  That turned out to be an expensive chair.

It was the judgment, recently entered against Roy for the furniture bill, that landed Roy in federal bankruptcy court.

At 74, Roy’s credit is ruined for the rest of his life. The bankruptcy could also affect his insurance rates, and the mortgage loan that is due to balloon in 3 years. Roy is paying an interest only mortgage payment now. He can’t afford for his mortgage interest rate to go up.

Roy filed Chapter 7 bankruptcy, which means all of the non-secured debt will be wiped out. He won’t have to pay the debt back, and none of the creditors can take any judgment enforcement action against him, such as levying his checking account or putting a lien on his house.  In the overall scheme of things, $20,000 is not enough to declare bankruptcy over.  In Roy’s case, however, he’s elderly and on a fixed income.  If his checking account is garnisheed, he’ll starve.

Roy really doesn’t understand any of this, because he never played an active role in his finances. Gene, of course, blames himself. He should have made it his business to know, he thinks. Maybe he could have stopped things from getting to this point, he thinks – if he only knew.

 

  • Are you actively involved in your parent’s finances, or the finances of a elderly relative?
  • Do you know if your parents have loaned money to anyone or given anyone their credit cards? What kind of financial hit would they take if they lost that money?
  • Do you owe your parents money? What would happen to them if you couldn’t pay them back?
  • If you’re married or in a significant relationship, who pays the bills?
  • How involved are you in your finances?
  • Do you know the name of your insurance agent?

 

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