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"Do It Right, Not Fast"

by Greg Mermel, C.P.A.

Published in the "Money and Taxes" column in PerformInk on DATE

Gather round, all you smug folks who filed your 2007 income tax returns in February, to watch your dilatory friends squirm and sweat as they try to create a tax return – right, wrong, who cares so long as it goes in on April 15?

Friends don’t let friends file screwed up tax returns, and the results of a last-minute frenzy are likely to be wrong for all but the simplest tax returns. So if they are actually people you care about (as opposed to, say, ex-wives), take them away from the keyboard and calm them down.

The best outcome from filing an inaccurate tax return is that you pay too much tax. That’s not a good outcome. But you may never know it, either. The IRS understandably does not spend any effort asking people if they think, maybe, perhaps – oh, just possibly you paid to much taxes. They’ll fix your math errors, and that’s about all.

More typical outcomes involve seemingly incomprehensible notices from the IRS and/or the Illinois Department of Revenue; you may also receive these puzzling documents from other states you filed in, or should have filed in, or would have filed in if you thought you would get caught or had a clue they wanted you to file. What they will all want is money. More money. Your money.

One can rationalize that, “hey, these are taxes I would have paid anyway.” But you still have to deal with this stuff. And part of the additional money – a big part in many cases – is penalties rather than those taxes.

There is a better way. File an extension request, and take the time to do it right.

A Nice Summer Project

A six-month extension of time to file your tax return will be automatically granted if you file form 4868, “Request for Automatic Extension,” on or before the due date. You can download it at http://www.irs.gov/pub/irs-pdf/f4868.pdf. Unlike the tax forms themselves, form 4868 is short and simple: name, address, Social Security number, your best guess at your taxes for the year, the amount paid so far (such as withholding), and the amount you are paying with the extension request. One-third of a page, no signature needed. Not much mental focus needed, either, so long as you remember to put a stamp on the envelope and mail it.

Remember, though that the other deadline -- paying your taxes -- is not extended. You will be charged interest and a late payment penalty (really, just more interest) if you haven’t paid by April 15.

Er... I’m Broke

If you don’t have the money to pay your taxes, you have two options: you can borrow money somewhere to pay the government, or you can owe money to the government. Unless that “somewhere” is a generous family member or significant other, you’re going to pay some interest and costs. The trick is to keep the amounts down.

(Actually, the trick is to plan your finances so that you either don’t owe money, or have the money to pay the tax bill. But that’s a topic for another column.)

You can pay your taxes by credit card, though I don’t generally recommend it. Here’s why. When you charge a purchase at a store, the merchant pays a fee (usually 2-3% of the sale amount) to the credit card company. The government can’t do that, so the taxpayer has to pay a “convenience fee” of about 2.5-3.0% of the amount charged; this is done through one of two private companies having agreements with the IRS and most states. In addition to this fee, you’ll usually be paying interest to the credit card company.

Credit card interest rates are almost always higher than the IRS’s combined interest and late-payment penalty. Even if you take into account the IRS fee, owing the government will probably cost you less than putting taxes on a credit card.

If you do want to pay by credit card, the two authorized companies are: Official Payments Corporation, 1-800-2PAY-TAX or www.officialpayments.com, and Link2Gov Corporation, 1-888-PAY-1040, www.PAY1040.com.

Owing the IRS can often be a better deal. The combined interest and late-payment penalty charged by the IRS is about 12% a year. If you want to pay them in installments, you need to ask apply for an arrangement by filing a form 9465. Like the extension request, it’s a simple form: the usual identifying information, how much you owe, how much you propose to pay each month, and what day of the month. If the tax debt is under $10,000, if the plan will pay it off in three years or less, and if you haven’t defaulted on these plans in the past, approval is virtually automatic. They will charge a $105 fee to set up the plan, though.

If it is just a matter of two or three months before you’ll be able to pay, you can save the fee. A notice will come a month or so after you file the return, saying what you owe with penalty and interest. Pay part then, and another notice – more strongly worded – will come a month or so after that. You can generally go through three notice cycles before reaching the stage where you must finish or go on a formal installment plan.

And If You’re Way, Way Behind

Really serious procrastinators are not looking at their 2007 taxes. They’re still getting around to 2006. Or 2005. Or even earlier years.

If you haven’t filed your 2004 tax return yet and think you are due a refund, you have to file within three years of the due date (including extensions) of that return to clam that refund. That means April 15, 2008 for 2004 tax returns, unless you got an extension. So do that one now. I mean it. Now. Or kiss that money good-bye.Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or 773/525-1778 (888/525-1778 outside the Chicago area).

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.

Free Offer

Every year during the income tax season, I offer free copies of my “Checklist of Potential Deductions...” for those in the arts. Just call my office, or send an email to checklist@gregmermel.com.

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