The Tax Man Come'eth (to the tune of $10K)

[hawkster]

Long story short...I owe $10,000 in back taxes, got the certified paperwork today .

My question is not how did I get here but am I better off paying the late fee's and penalties through the goverment or possibly taking out a home equity loan? There is also the possibility of me getting a part time job to try and get it paid off sooner...

What do y'all think?

[Seeker]

Long story short...I owe $10,000 in back taxes, got the certified paperwork today .

My question is not how did I get here but am I better off paying the late fee's and penalties through the goverment or possibly taking out a home equity loan? There is also the possibility of me getting a part time job to try and get it paid off sooner...

What do y'all think?

I assume that they give you some sort of options for payments in installments?

If so, and you think you can meet the payments with a second part-time job (that still allows you some life!), then go that route. Least savings troublesome and does not dig you deeper with additional debt to your home.

If you think that the additional loan on your house equity would be a viable alternative, at least you'd get a bit more back in taxes from the house interest deductions. And wouldn't have to stress yourself with additional "work."

For me, I'd probably go with either the additional equity or paying from savings. I wouldn't want to fool with the gov't.

[hawkster]

^^^^ Good points....

In addition I have roucghly $80K in equity.

Does any one know the specifics on what kind of interest and penalties the govt charges???

[sweeps]

See the IRS FAQ under section 1.5: "What kind of penalties and interest will I be charged for paying and filing my taxes late?"

[jIM_Ohio]

HIRE A TAX ATTORNEY!

Wife and I got audited for 2005 return. We owed 5k according to IRS. Tax attorney check was for $500. You cannot beat that return.

I did make a mistake on the return, but the IRS makes assumptions which have "loopholes".

Hire someone to prepare this for you. Even if you always do your own taxes, hire someone to help you or confirm you owe everything stated in audit. Mine was an honest mistake (a 1099 did not get forwarded to me after moving twice in 2005). Simple problem, compelx solution.

[sweeps]

So does the tax attorney just help reduce/eliminate the penalties, or does he help reduce/eliminate the actual taxes owed?

If OP owes $10,000 in back taxes, he should have to pay them.

[jIM_Ohio]

So does the tax attorney just help reduce/eliminate the penalties, or does he help reduce/eliminate the actual taxes owed?

If OP owes $10,000 in back taxes, he should have to pay them.

In my case the IRS said we owed 5k based on taxes and penalites of some stock I sold but did not report.

As I stated- the 1099 for this did not get mailed to me because we moved twice from when we sold it (in April of 05) to when we filed (February of 06). The IRS was correct that I did not pay taxes on the sale. They did not calculate the correct tax though.

I went back and checked Turbo tax- no 1099 from Solomon Smith Barney
I then called Solomon Smith Barney and asked them to send me an account history.

I took that history and the old return to a tax attorney.

The IRS assumed $0 cost basis in my situation. So we were taxed on the entire sale, not the capital gain. And because we filed everything within the deadlines of the letters sent, the attorney got all fees and penalties waived. In a portion of the case, I had a short term capital loss on my more recent purchases, so it is possible the IRS would have OWED me more money had I had more short term losses (because I had other 1099's which were gains on the return already, so that would have meant I paid too much in taxes).

The check my wife wrote was for $500 and it covered the attorney fee and the IRS payment.

I do not know what OP did wrong with his taxes. In my case I computed a similar cost basis, but wanted the peace of mind if the audit escalated, the person which prepared the adjusted return would be sitting next to me in my meeting with the IRS. That and my wife wanted a professional to do the amended return (there are extra forms to file for this etc...).

So the OP needs to decide- just pay what the IRS wants, or do work and lower it the payment. There is a reason those TV commercials can advertise they get 100k IRS liens knocked down to 10k debts. Consult a tax attorney when working with the IRS is my advice.

[Scanner]

I think JimOhio is offering sage advice if there is a possibility of error. And 10K isn't chump change.

To answer you more directly, generally speaking: penalties and late fees aren't too much of an issue. I have gotten hit for $10 here or there by the State on my employees payroll. I just paid the penalties and I am forgiven and it's business as usual (half the Congressmen and women have probably paid IRS penalties so my chances of a political career are actually enhanced )

Fines are another story.

Fines are usually substantial.

I am not sure if we are dealing with a fine here.

[MonkeyMama]

You'd probably be best off with a loan to pay it off.

I am a CPA and though I don't know the #s off of the top of my head, the penalties and interest on late taxes is absurd. The IRS website itself says you are better off paying it off with a credit card (as far as interest rates). & that is no lie.

That is my opinion. Interest rates may be something like 8%, and penalties on top of that.

I really don't remember the exact #s and usually have better clients, but I had a client in 2006 who was 2 years behind. So yeah, I Really encouraged her to scrounge up that money any way rather than pay all the interest and penalties. It just continues to add up faster than you can pay it off.

Scanner - don't underestimate IRS penalties. They can be pretty hefty. In most cases might as well call it "penalty interest" because it just grows every month.

(yeah - I just double checked out of curiosity. It is 0.5% MONTHLY penalty for failure to pay - which is equivalent to 6% annually). Well at least that doesn't compound... Looks like interest rates just dropped to 7% (IRS). That's 13% a year combined.

I'd take a HELOC any day.

P.S. If you take the installment option, it does not stop interest and penalties for accruing either - FYI.

[Scanner]

MonkeyMama,

I'll certainly defer to you.

I guess my penalties on payroll weren't that bad because I was only out of compliance for 3-5 months. I got a bill/penalty for failing to deposit late and that was that.

If this is a matter of years, yes, I could see how that adds up.