This amount (let’s call it “in the many thousands”) doesn’t come as a complete surprise since I made more cash last year than I did the year before, but still, it’s a large amount. As a freelancer I’ve learned to sock away 30% to 40% of each paycheck into a savings account set aside for taxes, so I’ll be OK to pay it. Other people might not be so lucky when Uncle Sam comes calling. A recent survey by the Federal Reserve found that 31% of people couldn’t even pay for a $400 emergency expense and 28% said they would need to borrow that money from friends or family
Luckily there are a few things you can do if you’re saddled with a tax bill you can’t pay.
1. Start at the Source
If you can’t pay your tax bill in full come April, fear not — you won’t be thrown in jail. (At least not yet!) The IRS offers a few ways to potentially alleviate the sticker shock. You could apply for an online payment agreement that allows you to pay your tax liability over time, or you could work with the IRS to settle for less than the full amount owed. That’s called an Offer in Compromise, and you can learn more about it — and if you qualify — here.
2. Ask to Have Your Penalties Reduced
Under certain circumstances — as in you or your spouse dealt with a serious illness last year or had an unusual tax event — the IRS has been known to work with taxpayers to waive certain penalties. Try writing a letter to explain the situation in detail, and be sure to specifically ask for an abatement. It’s worth a try.
3. Consider a Loan
If you’re in good financial standing otherwise, a personal loan through your bank with a decent interest rate could help you pay off a large tax bill right away. A better credit score will help secure a lower interest rate. You can view two of your scores for free on Credit.com.
4. Take out a HELOC
A HELOC — or home equity line of credit — often offers interest rates that are lower than credit cards or potentially even personal loans, plus your interest could be tax deductible. The downside is that defaulting could mean losing your home — not something to take lightly. Be sure you know what you’re getting into before taking this course of action — learn more about it here.
5. Put It on Your Credit Card
While it should only come as a last resort, paying your bill on a credit card allows you to pay your debt on time (at least as far as the government is concerned), while giving you some time to pay it off in full on your credit card. If this is the way you’ll pay your taxes, it’s worth researching credit cards with 0% APR introductory offers that can allow you to take your time paying off the bill without paying interest. Keep in mind there will be an additional fee — which could be quite substantial, depending on how much you owe.
Whatever option you take, be sure to research all the options before jumping in to understand which one is best for your financial situation.
Haven’t filed your taxes yet? Good news: You can get a six-month extension to do them. Bad news: You still need to pay your taxes by April 18 (this year’s deadline), or you’ll owe interest and fees for making a late payment. You have to do your best to estimate what you owe and make or postmark the payment by April 18.
How to Get an Extension to File Your Taxes
You can request an extension from the Internal Revenue Service by either submitting an electronic payment of your estimated tax due, filing an electronic Form 4868 or filing a paper Form 4868. Each option automatically gives you a six-month extension for filing your tax return, meaning you have until Oct. 18 to send in your paperwork.
To make an electronic payment to the IRS, you can make an online direct payment from your bank account, use the Electronic Federal Tax Payment System (requires enrollment) or use a credit or debit card. Making an electronic payment means you do not have to file a Form 4868, as the payment triggers an automatic six-month extension. If you file a paper Form 4868, you should include your payment.
What to Do If You Owe But Don’t Have the Money
People often want an extension from the IRS because they don’t have enough money to pay their tax bill. But that’s not how it works.
If you don’t have the cash to pay your taxes, you can make a partial payment, though the unpaid balance will be subject to interest and a late-payment penalty (generally one-half of 1% of the unpaid tax each month the balance goes unpaid, up to 25%). You could also pay your taxes with a credit card, though there’s a processing fee to do so, plus the interest you’d owe your credit card company. You can learn more about paying your taxes with a credit card here. While the IRS offers installment plans, you must file your tax return to apply for one.
Not only can paying your taxes late get expensive due to interest and fees, it could potentially damage your credit: The IRS could place a lien against your property for unpaid tax debt, which will show up on your credit report as a derogatory item. That can drive up the costs of other things in your life, like loan rates and insurance premiums. (You can see what’s affecting your credit by getting a free credit report summary every 14 days on Credit.com.)
We get it. Doing your taxes is no fun, especially if you know you’re going to owe money. But as with any project on which you procrastinate, leaving everything to the last minute can lead to errors, both large and small, and some of those errors could cost you serious money.
If you’ve gone and done it, though, and are still looking at that pile of tax forms over there in the corner, we’ve compiled a list of six quick-and-dirty tips that could keep you from making some obvious, and not-so-obvious, mistakes when you finally sit down and tackle the task. They could also help you maximize your tax refund.
1. You Forgot to Sign It
You might wonder how anyone could forget to sign their tax form, but this simple process is one of the most common tax mistakes, according to the IRS. Just like forgetting to sign a check or a contract, it means your return isn’t valid. Usually, there isn’t a penalty or interest associated with this error (since you’ve already included a check or electronic payment if you owed), so the IRS will just send a notice asking for a valid signature, but it will delay the processing of your return. If you’re getting a refund, that too will be delayed.
So check, double-check — heck, triple-check — that you signed or completed the e-signature process before filing your return. Also, check out these last-minute filing tips from the IRS.
2. You Miscarried the 9
Math errors are also a very common mistake made by folks in a hurry. Fortunately for most people, the IRS corrects any miscalculations, so there’s no need for filing an amended return. But these mistakes can mean the difference between you thinking you’re getting a refund and the reality that you actually owe taxes, so be sure to check your calculations carefully.
One way to help you avoid math errors is to file electronically so the calculations are done for you. Bye-bye, No. 2 pencil! So long, calculator!
3. You Didn’t Account for All Your Income
Did you have a side hustle early last year? A freelance design gig for a friend’s business? If so, you’re going to need to account for it, regardless of whether you received a W-2 or 1099 from whomever paid you. That’s because, while there’s an IRS threshold for filing these documents by employers, there’s no similar threshold for claiming the income. Income is income is income. If you made money and don’t report it — and the IRS catches it — it’s going to cost you penalties and interest at best, and open you to a possible audit at worst.
4. You Forgot Deductions or Tax Credit
It’s easy to forget these things when you’re in a hurry, but they can end up saving you some serious money and are well worth the extra time to figure out if you qualify. So if you’re just claiming the standard deductions because you’re under the gun, you might want to take a deep breath and check out TurboTax’s list of 10 commonly overlooked tax deductions that can keep you from overpaying the tax man.
5. You Filed for an Extension but Didn’t Understand the Rules
Filing for an extension is a great idea if you’re down to the wire and don’t really understand your tax situation. But remember that an extension gives you an extra six months to file your paperwork, but not an extra six months to pay any taxes due. So, if you’re confused, tax pros recommend doing a quick calculation of your taxes, filing for your extension and making any required payment of taxes you think you owe. This will help you avoid penalties and interest once you get your final calculations together.
6. You Didn’t Bother to Request an Extension
You gave up. You shoved, slammed and jammed your return through and now it’s full of mistakes that are going to cost you money by way of penalties or because you’ve left money on the table. It’s a much better idea to file the extension, then get the help you need from a tax professional to ensure you’re not overpaying your taxes.
Whatever you do, make sure you file your taxes. Unpaid taxes can have serious consequences on your personal finances, including your credit scores if they go unpaid long enough. You can see how any outstanding taxes you might have are affecting your credit by getting your two free credit scores, updated every 14 days, here at Credit.com.
This year, you have until April 18 to figure out how to pay taxes — April 15 falls on a Saturday, so taxes aren’t officially due until the following Tuesday. While there really isn’t a way to lower your tax bill at this point, although proper planning could lower it for next year, you may be wondering if you charge the bill to your credit card.
The short answer is yes, you can pay your taxes with a credit card. In fact, doing so may actually benefit you, if you’re using a rewards card. But there’s a lot to consider before doing you go this route.
Should You Use a Credit Card to Pay Your Taxes?
The answer here is maybe. If you have the means to pay your taxes in cash but are looking to earn some rewards, then a big tax bill is certainly a good opportunity to do that (assuming you pay the card off in full and don’t lose rewards to interest fees — more on that in a bit). But if you’re considering using your credit card to pay your taxes simply because you can’t afford them right now, the more prudent financial decision is very likely to talk to the IRS about a payment plan. Whatever you do, don’t avoid paying your taxes. It can have lasting ramifications for your finances, including your credit. You can see how your financial choices are affecting your credit by taking a look at your two free credit scores, updated every 14 days, on Credit.com.
Remember: There Are Fees
The IRS is contracted with three different companies to collect payments. These companies impose convenience fees that range from 1.87% to 2%. (You can read more about how to pay your taxes with a credit card here.) In order to profit by paying your taxes with a credit card, you have to earn more than the fees they are charging you.
There are a lot of rewards cards out there that offer 1.5% to 2% cash back on purchases. But if you’re paying 1.87% and earning 2% you aren’t profiting much (on a $5,000 tax bill, you earn $6.50).
Paying With an Existing Card
If you don’t want a new card, or think you won’t qualify for a rewards card, it can still be advantageous to use your existing card can have advantages over paying your taxes through your bank account, even if it doesn’t have cash back. Credit cards give you a grace period from when you charge, to when you have to pay. Let’s suppose your card cycles on the eleventh of the month, so you pay your taxes on April 12. The next cycle ends on May 11 and your payment is due on June 11. That’s two extra months to hang onto your money and not incur any interest.
Considering a New Card Instead?
There are a lot of options out there, so you’ll want to think about which one would be most financially beneficial. Here’s an example: The Chase Sapphire Preferred card (read our review here) offers a 50,000 point signup bonus if you spend $4,000 in the first three months.
So, let’s suppose you have a $5,000 tax bill. After factoring in the fee, you spent $5,093.50, and you have 55,093 points available. If you cash out your points, you earn $550.93, a profit of $457.43. Not bad for a bill you were required to pay anyway. (It’s worth noting that this particular card does have a $95 annual fee, which is waived for the first year.)
If you plan to travel, then your rewards could be redeemed for a bit more. When you use your Chase rewards points to book airfare, hotels, car rentals or a handful of other travel expenses, you get a 25% bonus. So that $550.93 actually turns into $688.66 toward travel expenses booked through the Chase Ultimate Rewards portal. In other words, you’ve just paid for a plane ticket to just about anywhere in the U.S. (Have a Chase rewards card? Check out these three hacks for using the Chase Ultimate Rewards program.)
Can’t Pay the Card Off Right Away?
Now, if you can’t afford to pay off the balance of your tax bill right away, the above is moot. Here’s why: There’s no introductory 0% APR on balance transfers or new purchases with the Chase Sapphire Preferred, or many cards like it, so unless you can pay it off right away, you’re going to incur interest on that balance. This particular Chase card comes with a variable APR of 16.49% to 23.49% based on your creditworthiness, which would quickly offset any rewards you may earn.
If you can’t afford to pay your taxes right away, but you’re set on using your tax bill to net some nice rewards, there are some cards that offer a 0% APR on new purchases that can also give you some nice rewards, like the Discover it card.
The Discover it card (read our review here) comes with an introductory 0% APR on purchases and balance transfers for the first 14 months. After the introductory period is over the APR will change to a variable 11.49% to 23.49%. When you use the Discover it card to pay your taxes, you will receive 1% cash back. Additionally, Discover will match all cash back earned for the first 12 months. That means, sticking with the $5,000 tax bill, the overall cost would be $5,093.50. Including the cash back match, you would earn $100 in cash back, making your overall profit $6.50. While this isn’t a lot of money, you were also given up to 14 months to pay off your bill without accruing interest, which may be an even bigger reward for some people.
At publishing time, the Discover it card is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).
If you’re expecting a big tax refund this year, you’ve probably already decided what you’re going to do with that money. Whether it’s a vacation, a new jet ski or a nice boost to your retirement savings, you’re probably pretty excited about the extra cash. But here’s the deal: Getting a big tax refund each year isn’t necessarily a good thing. It means you haven’t been putting that money to work for you all year long.
“If you are receiving a refund this year, it means that you overpaid your taxes during the course of the year. Instead of giving the government your hard-earned money, think about all of the great things you could have done with that money,” says Ron Weber, a senior marketing manager with Quicken Inc. “You could have paid off credit accounts, invested it in your future, and/or spent it as you earned it. Money is always better in your pocket than in someone else’s — even if that someone else is the government.”
Here’s how you can make sure you boost your bottom line this year by not overpaying your taxes and also not getting a refund.
Review Your Withholdings
Sit down and review your paycheck withholdings and see if you can break even when it comes to the taxes you pay. You’re looking for your Goldilocks zone. Not too little, not too much, but just right.
“If you are unsure what to do, experiment until you get it right,” Weber advises. “Most people are unaware that you can change your number of payroll exemptions as many times as you wish.”
You can also try using a tool to help you find your Goldilocks zone. The Internal Revenue Service has a withholdings calculator that can help you see how much difference a change in your withholdings will make. Certainly, you don’t want to owe taxes next year if you can avoid it, but getting your tax refund as close to zero as possible means you can invest or spend the additional income on a regular basis instead of letting the Treasury Department store it for you.
As you review your withholdings, you’ll want to be sure you …
Don’t Forget Your House …
If you own your own home, you probably know you can claim mortgage interest and property tax deductions, so take into account how much that will reduce your tax burden.
… Or Your Investments
If you own investment property, you’ll also want to consider any expenses you can deduct that might affect your taxes for next year.
… Or Big Life Events
“There are certain life events that you want to keep in mind when changing your exemptions such as marriage, having children or any situation where you decrease the number of dependents, such as divorce,” Weber says. “Also, keep in mind that while you are able to change the number of withholdings as often as you wish, your employer doesn’t have to apply it until the first payroll ending 30 days after you submit the change, effectively limiting the number of times you actually can change. Other than these considerations, the ultimate goal each year is to get your refund close to zero. Make it a game and see how close you can come.”
But You’re Terrible at Saving Money, You Say?
Of course, if saving isn’t your forte and you’re going to just end up spending whatever additional income you get throughout the year, letting Uncle Sam hold it for you might not be such a bad idea if you plan to put your refund directly into a retirement account like an IRA. The IRS will even help you keep your promise to invest the money by direct depositing all or part of your refund into savings, an IRA or even toward buying savings bonds.
If that’s your situation, you can read our guide on how to maximize your tax refund. But investing that money into a 401K throughout the year could be a better alternative, especially if your employer provides matching funds.
Also remember that keeping your credit in good standing helps you save money throughout the year, on everything from loan and credit card interest rates to mortgages. A good way to check on how your credit is faring is by getting credit your two free credit scores, updated every 14 days, on Credit.com.
Resistance to taxes is baked into Americans’ DNA. After all, it was cries of “taxation without representation” that spurred the American Revolution. Tax protests have continued on and off ever since, from the Whiskey Rebellion to Vietnam War-era tax resisters to the “sovereign citizen” movement.
People object to paying taxes for all kinds of reasons, from opposition to certain policies to not recognizing the government’s authority to collect taxes in the first place, but the IRS isn’t having it. No matter what you read on the internet or your weird Uncle Bob says, you can’t get out of paying taxes without suffering consequences.
“The IRS and the courts hear many outlandish arguments from people trying to avoid their legal filing and tax obligations,” IRS Commissioner John Koskinen said in a statement. “Taxpayers should avoid unscrupulous promoters of false tax-avoidance arguments because taxpayers end up paying what they owe plus potential penalties and interest mandated by law.”
Now, that doesn’t mean there aren’t things you can do to legally avoid taxes. Taking all your deductions or moving money into tax-sheltered accounts like a 401K are perfectly acceptable ways to lower your tax bill. It’s when you get into weirder tax avoidance strategies that you run into problems. (Note: Not paying your taxes can have serious implications for your credit. Check out our quick guide for keeping your taxes from messing with your credit. While you’re at it, you can also get your two free credit scores, updated every 14 days.)
Trying to claim that filing a tax return is optional, that you aren’t really a citizen of the U.S., or that only certain types of income are taxable will backfire. When you submit a frivolous return or slam the IRS with other off-the-wall requests the result may be a fine of $5,000 to $25,000. Plus, you could also be prosecuted for tax evasion, a felony punishable by prison time and penalties of up to $250,000.
Below, we’ve highlighted 10 of the more bizarre reasons why people say they shouldn’t have to pay taxes.
1. Filing a Return & Paying Taxes Is Voluntary
The first and perhaps most direct argument against the U.S. tax system is the idea that filing a return and paying taxes is voluntary. Primary points include court cases like Flora v. United States, in which the term “voluntary” is used to describe how the tax system is based on “voluntary assessment and payment, not upon distraint.”
But when the IRS says filing a return or paying taxes is “voluntary” what it really means is that a taxpayer has the right to determine his or her tax liability by completing the appropriate forms, as opposed to having the government complete the forms and determine the bill. It doesn’t mean you have the option to opt out of the system entirely.
2. The Money They Earned Isn’t Really Income
According to this anti-tax argument, the money you receive for working isn’t technically income. Rather, you’re engaged in an equal exchange of your labor for fair market wages, and thus there’s no “gain” to be taxed. In this view, the government only has the right to tax gains or profit, not wages.
In reality, the IRS is allowed to tax virtually all your income, whether it’s dividend income from stocks or wages you receive from your employer. Exceptions include gifts and inheritances (though large estates may have to pay an estate tax), child support, life insurance benefits, and welfare payments.
3. Taxes Are Against Their Religion
You may not believe in paying taxes, but the IRS isn’t buying it. Though churches and other religious institutions are exempt from taxes, the same does not apply to individual taxpayers.
Allowing people to opt out of taxes on religious grounds would cripple the tax system. In the United States v. Lee, the U.S. Supreme Court ruled that “[t]he tax system could not function if denominations were allowed to challenge the tax system because tax payments were spent in a manner that violates their religious belief.”
4. Paying Taxes Violates the Fifth Amendment
Some argue that including financial information on a return may bring unlawful or illegal activity to light, thereby forcing a taxpayer to forego their Fifth Amendment protections.
The IRS calls this a “blanket assertion” of constitutional privilege. The agency asserts that there are no constitutional grounds for the refusal to file a tax return based on the Fifth Amendment. In cases like the United States v. Sullivan and the United States v. Neff, the courts back the IRS’s position.
5. Paying Taxes Is a Form of Slavery
The U.S. has prohibited involuntary servitude (except as punishment for a crime) since 1865, when the 13th Amendment was ratified. Since then, some anti-tax protestors have tried to equate paying taxes to slavery, arguing that having to send some of their money to the IRS is a constitutional violation. Even prominent politicians have evoked this absurd anti-tax argument. “If we tax you at 50% you are half slave, half free,” Rand Paul said in 2015. But the IRS and the courts have declared the “taxes equals slavery” claim bogus.
On the flip side, arguments that African-Americans and Native Americans can claim a tax credit as reparations for slavery and other forms of oppression are invalid. While there have been serious arguments that the U.S. should pay reparations to the descendants of former slaves, the government has not taken any such action.
6. The 16th Amendment Doesn’t Count
The 16th Amendment to the Constitution is short and to the point: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Yet some tax protestors argue the 16th Amendment is invalid because it was not properly ratified or that Ohio was not properly a state at the time it voted for the amendment. (Ohio has been a state since 1803; the amendment was ratified in 1913.) “Proponents mistakenly believe that courts have refused to address this issue,” the IRS noted. “There were enough states ratifying the Sixteenth Amendment even without Ohio to complete the number needed for ratification. Furthermore, after the Sixteenth Amendment was ratified, the Supreme Court upheld the constitutionality of the income tax laws.”
7. Their State Isn’t Part of the United States
Among the goofier anti-tax arguments is the assertion that only people who live in the District of Columbia, in federal territories, or on Indian reservations or military bases have to pay federal income tax. Everyone else is supposedly a citizen of a “sovereign” state, not the U.S., which means they’re exempt from federal income tax. Not so, says the IRS.
“The Internal Revenue Code imposes a federal income tax upon all United States citizens and residents, not just those who reside in the District of Columbia, federal territories, and federal enclaves,” the IRS explained.
8. The IRS Is Secretly a Private Corporation
Some conspiracy theorists are convinced the IRS isn’t actually part of the federal government at all. Supposedly, it’s a private corporation masquerading as a government agency, and it actually has no authority to enforce the tax code. In the 2002 case Edwards v. Commissioner, the court dismissed the claim as “tax protestor gibberish.”
9. They’ve Rejected Their Citizenship
You can’t reject your U.S. citizenship or claim to be a “free born citizen” of a particular state in order to get out of paying taxes. “Claims that individuals are not citizens of the United States but are solely citizens of a sovereign state and not subject to federal taxation have been uniformly rejected by the courts,” according to the IRS.
Even if you were to formally renounce your U.S. citizenship (which involves appearing in person at a U.S. embassy or consulate in another country), you still may not be able to escape your tax bill. “Persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect on their U.S. tax or military service obligations,” the State Department explained.
10. They Aren’t Technically a Person
In various court cases, this argument has been declared “meritless” and “frivolous and requir[ing] no discussion.” Here’s a tip: If the government is willing to consider a corporation a person, they’re definitely going to consider a person a person.
Back in September of 2015, I lost my job and decided to take unemployment benefits for the first time in my life while I looked for a new one. Even the significantly reduced income that the unemployment benefits provided was a needed cushion since we’d closed on a new home the same week I lost my job. I’d crunched the numbers, and taking the benefits was going to be a better alternative than using money from our emergency fund (which was tied to the markets and had fallen significantly just the month before).
What I didn’t account for was taxes, so when I received that 1099-G form from the unemployment commission last spring, I was confused. I owed income tax on the benefits I’d received, which were already just 25% of what my income had been? Seriously? It felt unfair that my employers had been paying into unemployment insurance all these years so I’d have the benefit if I ever needed it, and now the government was going to take a good-sized chunk of that money I needed to keep our family afloat.
After a couple of hours of grumping, I bucked up, talked to our accountant and moved on. Of course it was my fault that I didn’t ask the right questions and do the necessary research to see what the tax consequences of receiving unemployment benefits would be. I was more mad at myself than anything, but the reality was that, instead of getting a refund, I was going to be paying Uncle Sam a couple thousand dollars.
Here’s how you can avoid having to do the same:
1. Get Those Taxes Withheld
If you’re currently unemployed, are receiving benefits and aren’t having taxes withheld, request that they do so now. Yes, your benefit amount will decrease, but it’s easier to cut back a little each week now than it is to come up with a larger lump sum when your taxes come due.
2. Review Your Filing Options
If you received unemployment benefits in 2016 and didn’t have taxes withheld, you’re going to have to pay them. Fortunately, there are some ways to mitigate just how much.
“You do have to claim your unemployment income, but remember your new lower income may make you eligible for tax benefits you couldn’t qualify for before,” said Lisa Greene-Lewis, a CPA and tax expert with TurboTax. “You also may be eligible for tax deductions and credits which can lower your tax liability.”
For example, you could qualify for the Earned Income Tax Credit, which is worth up to $6,269 for a family with three or more children. There’s also the Child Tax Credit of $1,000 for each dependent under 17 years old, and Education Tax Credits like the Lifetime Learning Credit, which can be up to $2,000. (You can find a quick guide to common tax exemptions and deductions here.)
“Credits are great because they lower your tax liability dollar for dollar,” Greene-Lewis said. “Also don’t forget what the IRS calls above-the-line deductions like deductible expenses for educator expenses paid up to $250, student loan interest up to $2,500, moving expenses for a job, and deductible IRA contributions, which can lower your taxable income.
“If you make below the IRS income filing threshold of $10,350 single ($20,700 married filing jointly), you also may not be required to file your taxes, however, you should if you had federal taxes deducted in your paycheck,” she said.
It could be worth your time and effort to get some guidance from a tax professional if you’re feeling uncertain about how all these credits work. If you can’t afford to pay a professional and you made less than $54,000 last year, there are free tax preparation services provided by the IRS. You may have to stand in line for a bit, but it could end up saving you significantly on your taxes.
3. Don’t Avoid Filing or Paying Your Taxes
Getting into trouble with the IRS is the last thing you want to deal with coming off of a stint of unemployment, so if you’ve reviewed all of the above options and find you’re still going to have a hefty tax bill due that you simply can’t afford, don’t panic, and definitely don’t put off dealing with the situation.
First, if you’re once again employed and can qualify for a credit card with a 0% introductory offer for purchases, you could pay your tax bill using that card and pay it off over time without any interest or penalties. It’s a good idea to check your credit scores before applying to ensure you qualify. You can get your two free credit scores, updated every 14 days, here on Credit.com.
If that’s not an option for you, you could consider using a credit card you already have, especially if it has a low APR, but you’ll end up paying significant interest, which will end up just costing you more money and probably isn’t a great idea. Instead, your best bet is likely talking to the IRS and asking for an installment agreement. That, Greene-Lewis said, allows you to pay your tax liability over a six-year period if necessary.
Donald Trump’s taxes have been a centerpiece of the election cycle — but the particular tax issues he’s faced have likely been beyond the pale for average Americans. Questions about releasing his returns, how much he’s donated to charity and whether his nine-figure losses should have offset his federal income tax responsibilities are not the kind of things most of us have to deal with as the April 15 tax deadline looms.
That changed a bit earlier this week, however, with a story in the New York Times that looked at how Trump was able to avoid reporting hundreds of millions of dollars in taxable income in the 1990s. It turns out the issues he may have been dealing with aren’t necessarily so different than those faced by millions of Americans — albeit on a much larger scale.
How Canceled Debt Affects Your Taxes
The issue revolves around canceled debt. When someone owes a bank some money, and they are no longer able to pay that money back, they may negotiate with the bank for a cancellation of all or a portion of that debt. This can happen in foreclosures, short sales and even when people owe money on their credit cards that they can’t afford to pay.
Let’s say, for example, you owe $25,000 on a credit card, but you simply can’t afford to pay it all back, and the interest and fees make it unlikely that you’ll ever be able to pay it back. You call up the bank and explain the situation and they agree to do a deal wherein you pay them $10,000 and they forgive the remaining $15,000. In addition to the credit consequences (that $15,000 in canceled debt will likely be documented on your credit report) there are tax consequences too. The IRS treats canceled debt like this as income, which means you’ll have to pay taxes on it, just as you would for your salary. People in this situation will often get a form called a 1099-C in the mail which documents this tax liability. Sometimes these forms come many years after the debt is forgiven. We’ve written about 1099-C problems extensively in the past and many people have no idea about potential tax liabilities when they are negotiating debt forgiveness with a financial institution. In fact, nearly 6 million Americans get 1099-Cs in the mail every year.
Trump’s Canceled Debts
So what does any of this have to do with Trump? A New York Times story by David Barstow, Mike McIntire, Patricia Cohen, Susanne Craig, and Russ Buettner published earlier this week looked at how the mogul allegedly dealt with his canceled debts in connection to overall losses in his casino business.
“As that empire floundered in the early 1990s, Mr. Trump pressured his financial backers to forgive hundreds of millions of dollars in debt he could not repay. While the cancellation of so much debt gave new life to Mr. Trump’s casinos, it created a potentially crippling problem with the Internal Revenue Service. In the eyes of the I.R.S., a dollar of canceled debt is the same as a dollar of taxable income. This meant Mr. Trump faced the painful prospect of having to report the hundreds of millions of dollars of canceled debt as if it were hundreds of millions of dollars of taxable income.”
So what did Trump do? According to the Times, he may have been able to offset those tax liabilities by using a stock-for-debt swap provision that existed in the tax code at the time. Here’s how the Times describes it:
“The strategy, known among tax practitioners as a “stock-for-debt swap,” relies on mathematical sleight of hand. Say a company can repay only $60 million of a $100 million bank loan. If the bank forgives the remaining $40 million, the company faces a large tax bill because it will have to report that canceled $40 million debt as taxable income.
Clever tax lawyers found a way around this inconvenience. The company would simply swap stock for the $40 million in debt it could not repay. This way, it would look as if the entire $100 million loan had been repaid, and presto: There would be no tax bill due for $40 million in canceled debt.
Best of all, it did not matter if the actual market value of the stock was considerably less than the $40 million in canceled debt. (Stock in an effectively insolvent company could easily be next to worthless.) Even in the opaque, rarefied world of gaming impenetrable tax regulations, this particular maneuver was about as close as a company could get to waving a magic wand and making taxes disappear.”
According to the Times, Trump allegedly stretched this strategy one step forward by swapping debt with partnership equity in his then-flailing casinos.
Trump, who is no fan of the New York Times, declined to comment for the article. (His campaign also did not respond immediately to Credit.com’s request for comment.) Trump’s spokesperson, Holly Hicks, did send the Times this statement in an email: “Your email suggests either a fundamental misunderstanding or an intentional misreading of the law… Your thesis is a criticism, not just of Mr. Trump, but of all taxpayers who take the time and spend the money to try to comply with the dizzyingly complex and ambiguous tax laws without paying more tax than they owe. Mr. Trump does not think that taxpayers should file returns that resolve all doubt in favor of the I.R.S. And any tax experts that you have consulted are engaged in pure speculation. There is no news here.”
So how does all of this this relate to the average American who may have gotten a 1099-C in the mail and is facing a steep tax bill because of canceled debt? Well, given Congress banned stock-for-debt swaps in 1993 and equity-for-debt partnerships back in 2004 in order to eliminate the potential for abuse, no one will be able to replicate the strategy The Times alleged Trump to have used. Nevertheless, imagine if this option were available to everyday Americans. What might it look like?
Let’s go back to our earlier example: the $25,000 credit card debt. Let’s say the bank has agreed to forgive the whole thing, but you don’t want to get stuck paying income taxes on that $25,000. Since you’re an average American who doesn’t have stock to trade away and can’t do a “stock-for-debt swap,” let’s call this a “sock-for-debt swap.” You send the bank a cardboard box full of your old socks and tell them that they are worth $25,000. They bank doesn’t really care, because they’ve already forgiven the debt and written it off their books, but you get to tell the IRS that the bank hasn’t really “forgiven” anything. You traded that credit card debt for $25,000 worth of fabulous, beautiful, old socks. So you’re in the clear.
What to Do if You Get a 1099-C
The reality is most Americans can’t make much of an argument when they get a 1099-C in the mail. Still, there are a few steps you can take if you are really in dire straits and can’t afford to pay.
Consumers might be able to avoid paying taxes on canceled debts by claiming the insolvency exclusion. Per the IRS, a taxpayer is insolvent when their total liabilities exceed his or her total assets. You may also be able to avoid paying if the debt was discharged in bankruptcy. You can go here to learn more about what to do if you get a 1099-C.
The Internal Revenue Service will soon begin using private collection firms for some overdue federal tax debts, the department announced Monday.
The new program, authorized under a federal law enacted by Congress last December, is slated to begin next spring. Four private, debt-collection contractors — CBE Group, Conserve, Performant and Pioneer — have been designated to collect outstanding tax debts, the IRS said in a prepared announcement.
“As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act,” the announcement said.
Several factors contribute to the IRS assigning these accounts to private collection agencies, the announcement said, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.
Look For Written Notice From the IRS
It was unclear from the announcement if these companies will be allowed to call taxpayers about their debts, something the IRS has never done and has previously been a surefire way of spotting a scammer. Calls to the IRS Taxpayer Advocate office were not immediately returned, but the announcement did provide some details regarding the private companies’ IRS debt collection practices that could prove helpful in determining whether any correspondence is legitimate. For instance, the IRS will provide affected taxpayers and their representatives with written notice that an account is being transferred to one of the agencies.
“The agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer,” the announcement said. “Private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to IRS, not the private collection agency.”
The announcement acknowledged potential confusion with phone tax scams, which involve people posing as IRS agents in order to scare someone into turning over their payment or personal information.
“The IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities,” the agency wrote. “The IRS will continue to keep taxpayers informed about scams and provide tips for protecting themselves. The IRS encourages taxpayers to visit IRS.gov for information including the ‘Tax Scams and Consumer Alerts’ page.”
Remember, if you are ever concerned about the legitimacy of debt collectors, particularly those trying to collect a tax debt, it is best to err on the side of caution. If you receive an email, for example, do not open any links. Rather than answer, forward the email to firstname.lastname@example.org.
While you’d never know it if you listen to politicians on the right and left argue, there are some truths out there, things that don’t yield to debate. I’m talking basics, like it’s easier to walk through an open door, and the Internal Revenue Service shouldn’t be in the business of providing open doors to pervasive forms of fraud.
Are you rolling your eyes? Well, it’s happening once again at everyone’s favorite punching bag, the Internal Revenue Service. Granted, past fails haven’t been intentional—whether we’re talking about the “Get Transcript” hack that affected 700,000 taxpayers or this year’s E-File PIN attack that involved more than 464,000 unique Social Security numbers. There was incompetence and a lack of farsightedness in those instances, for sure, but the latest wrinkle at the IRS has the agency turning a blind eye to crime. It has been happening in broad daylight without the slightest twinge of worry that maybe someone should, you know, maybe do something about it — that is, until this month.
Undocumented Workers Using Stolen Social Security Numbers
Forget about Obama’s “path to citizenship.” Forget about “amnesty.” This goes beyond partisan bickering over a label.
I first became aware of the issue through the lens of right-wing media and almost dismissed it due to my own political assumptions. To be fair, it was so poorly reported and exclusively discussed on conservative websites like Breitbart, All That’s News and the Tea Party Patriots.
The story, featuring undocumented workers stealing Social Security numbers to apply for jobs and fill out W-2s under the watchful eye of the IRS, was first made public during a Senate Finance Committee meeting, when Sen. Dan Coats of Indiana asked IRS Commissioner John Koskinen to explain why the IRS doesn’t inform certain victims of employment-related identity theft — specifically people whose Social Security numbers have been used by undocumented immigrants to get work or fill out W-2 forms.
I rationalized these reports as little more than “echo chamber” attacks on Big Government. But a week later I read about it in The Hill. There it was: Koskinen confirming that when the IRS discovers undocumented immigrants have used a stolen SSN to apply for jobs or fill out W-2s but files their taxes using an Individual Tax Identification Number (ITIN) — a number often provided to undocumented immigrants to pay taxes — they get a pass from the agency.
According to the report, this will no longer be the agency’s standard operating procedure by January 2017, when the IRS will begin informing victims of employment-related identity fraud.
While that’s great news, it boggles the mind that such a situation could have been allowed to persist. Koskinen’s argument for not implementing a solution sooner was basically that people who want to pay taxes should be able to do so because collecting the revenue is in everyone’s best interest and that the agency could not find an effective way to notify compromised individuals while protecting sensitive taxpayer information on both sides.
While the IRS may be collecting revenue from the undocumented workers who are filing returns, Republicans on the Senate Finance Committee raised concerns of these filers actually receiving refunds from the IRS fraudulently. In theory, if an illegal worker gets a Social Security number, he can file three years of back taxes and claim the Earned Income Tax Credit, providing he can remember all the details of his off-the-books earnings during that time period.
Sen. Chuck Grassley (R-Iowa) asked Koskinen about this theory and Commissioner Koskinen confirmed:
To clarify my earlier comments on EITC, not only can an individual amend a prior year return to claim EITC, but an individual who did not file a prior year return may file a return and claim EITC (subject to refund limitations under section 6511 of the Internal Revenue Code). I would note that filing new returns for prior years would likely be difficult, since filers would have to reconstruct earnings and other records for years when they were not able to work on the books. Section 32 of the Internal Revenue Code requires an SSN on the return, but a taxpayer claiming the EITC is not required to have an SSN before the close of the year for which the EITC is claimed.
When it comes to identity-related tax fraud, nothing is too complex if there’s a payoff. While I can’t say if the situation with unreported employment-related identity fraud as described here has ever been used to make unlawful grabs at Earned Income Tax Credits, this is just one question regarding what is doubtless countless possible crimes that can be committed because the IRS decided employment-related identity fraud should get a pass for the sake of revenue.
The bottom line is that if it can be imagined, it can be achieved. The fact that the IRS has essentially looked the other way when it comes to the unlawful use of personally identifiable information in the face of our identity crime Armageddon is inexcusable.
At the end of the day, this has to stop being viewed as a political issue. Republicans will blame the situation on President Obama’s “amnesty” policies geared toward getting undocumented immigrants integrated as taxpayers (maybe), Democratic voters (probably) and welfare recipients (for sure). In other words, the whole enchilada. Democrats eschew the amnesty label, preferring to talk about “a path to citizenship,” with the very serious goal of creating a safer, opportunity-filled world for immigrants who will (most likely) vote Democratic.
The problem: Neither party sees it as an epic fail.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.