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How to Pay an Ugly Overdue Tax Bill

December 6, 2011 by Average Joe 6 Comments

I just read that Christie Brinkley owes over $500,000 in back taxes. That’s an ugly place to be. Sadly, I’ve been there before (not $500,000, but still a sizeable chunk of money). I’d like to share that story here.

When I began advising people about money, my background was similar to the many professional athletes who become financial advisors: I had no training. I was exactly “that guy” the pros and financial books warn you about when they say “don’t hire the new advisor.” Sure, I’d passed a few tests and took classes sponsored by the company I was going to work for, but I’d been an English major in college with an emphasis in creative writing. Talk about “not in Kansas anymore.” I wasn’t even on the same planet.

Why I’m An Expert In This Area

So, there I was, learning quickly. My paranoia about my lack of knowledge and the ability to “dumb down” difficult financial concepts helped me with early success in my new field—probably because I was coming at those concepts from a similar non-finance point of view. I hauled in a nice income. I had a great relationship with my clients. If I didn’t know something (which was often), I said “I don’t know, but I’ll find out.” That happened a ton.

Here’s the bad part of the story. I was a 1099 independent contractor. (For those of you unfamiliar with “1099”, it means that I didn’t actually work for the company. Because I was technically independent, zero taxes were taken out of my compensation. Without an knowledge of the full impact of not paying taxes, this was a financial meltdown ready to burst.)

Near the end of my first awesome year a friend said, “Who is your accountant?”

Me (thinking): “Dude, I should get one of those!”

So, I did. I found a guy named Tom. He was a great number-cruncher, but a horrible financial coach.

Tax guy Tom: “You owe $26,000.”

Me: “WTF?”

Tax Guy Tom (clueless): “Do you want to attach a check to the return?”

Me: “WTFFF????” I’m pretty sure I yelled. Yeah, I screamed. I should have been screaming at myself. It didn’t matter. He couldn’t believe I was dumb enough to spend every penny of the money I’d made. The funny part now is that I had used all that money to pay down debt.

I’d committed every stupid mistake in the book.

So, what did I do? I made the brilliant decision not to file my taxes, thinking that I’d find a way to catch up.

Note to the world: It doesn’t work that way. You can’t catch up.

So, Christie, I understand an overdue tax bill. I know that today you say that it’ll all be paid quickly. That’s good. If you can’t, or if any other reader is in a similar situation, here’s what to do. This is what I should have done:

Joe’s Awesome 7 Step “Get Your Overdue Tax Bill Paid” Plan (or “Here’s What I Did”)

1) Find good tax advisors. My advisor helped me file back taxes and face the music. By avoiding the overdue tax bill, it was becoming bigger and more difficult to pay. I thought I was finding a “good” advisor when I met Tom. ….but, had I known how to ask questions, it would have gone smoother. AND I should have known to interview more than one person. I found a guy with lots of pretty letters after his name and hired the first one. I needed someone who could walk a beginner through the process of receipts and “what’s deductible and what ain’t.”

2) Communicate with the IRS. You need to face the music sooner or later. What surprised me is how easy the IRS people were to talk with. I was ashamed of my overdue tax bill, but they deal with people that have late taxes all day, every day.

Here’s a tip: the IRS phone line gets busy, so if you’re going to call, do it right after they open. You should get right through (I now call whenever I have questions or am feeling lonely). In my case, they knew promptly what programs to point me toward. Why did I call the IRS? My tax advisor told me to call them. She said it would help me stay on top of the situation. She also talked to them from time to time. (I had to sign a paper giving her the limited power to discuss my personal tax situation with the IRS first.)

3) Decide which method works best. There are two general directions you can decide between if you can’t pay the entire overdue tax at once. First, you can opt for an offer-in-compromise. This is a settlement with the IRS to pay less than your bill. I couldn’t go this route because (as my tax advisor explained), I had a high income stream and there was a good probability—in the IRS’ eyes—that they’d be able to collect the whole amount sooner or later (it was going to take me 30 years, but they don’t care. They may be nice, but those IRS zombies live forever, apparently.—I HAD to have one IRS joke in this piece….). If you owe less than $25,000, you can apply for an installment agreement, and will usually be accepted as long as you haven’t been a repeat offender. For amounts more than $25,000, the IRS is a little more like a nervous loanshark. You’ll have to fill out some extra paperwork.

4) Fill out the appropriate paperwork. Here’s a link to the IRS page describing all the appropriate tools. Before anything, you need to file the appropriate tax forms, if you haven’t already. Once that’s done, if you owe more than $25,000 on your overdue tax bill (like I did), you’ll need to fill out Form 433F, the Collection Information Statement. If you’re pursuing an installment agreement, complete Form 9465, Request for Installment Agreement. For an Offer in compromise, read IRS Booklet 646. It explains thoroughly the process of applying to reduce the amount you owe the government.

5) Be prepared to pay a fee to set up the agreement. As of this writing, direct debit and online payment plans cost $52, while payroll deduction plans run $105.

6) Wait for an answer from the IRS. They’ll respond in writing. If you called the IRS as I recommend above, you may receive an answer while you’re on the phone with the agent.

7) Realize that speed is your friend. Confronting the pain today is better than waiting. If you’ve managed to accumulate $500k in debt, you’ll owe interest and may owe penalties if you didn’t communicate effectively with the IRS.

Forms Needed:

IRS Collection Information Statement, Form 433F

IRS Installment Agreement Request, Form 9465

IRS Offer in Compromise booklet 646

Have a tax issue you’d like to discuss? While AverageJoe and TheOtherGuy aren’t tax advisors, we can point you toward resources and strategies. Use the comment section below or email me at joe (at) thefreefinancialadvisor (dot) com.

There’s Something Wrong With The Car

November 10, 2011 by Average Joe 19 Comments

There are good days and then there are bad days. Neither of those descriptions fit last Saturday morning.

I woke up to my son running in the door.

Nick: Dad, there’s something wrong with the car. You have to come outside.

me: Where did Kim Kardashian run off to?

Nick: Dad, wake up. Come outside.

me: What time is it?

Nick: 7 o’clock. Come outside. There’s something wrong with the car.

me: (suddenly realizing Kim isn’t coming back, I’m not drunk in a Beverly Hills swimming pool and I’m a happily married parent of twin 16 year olds) What’s wrong with the car?

Nick: Just come outside

Cheryl: Go, Joe

me: (I’m thinking to myself: why don’t you go?) I’m saying out loud: Okay

(18 years! Why do you ask?)

Cheryl (to Nick): What’s wrong with the car, honey.

Nick: I hit a mailbox.

me: Okay. (out of bed, throw on jeans and a tee-shirt, follow Nick outside)

I shouldn’t interrupt the story here, but it’s time for a little op/ed piece.

Who the F$%# decided that mailboxes should go in brick structures? My mailbox looks like this:

Awesome dent in the side, huh? I was going to actually change this mailbox until some kids late at night kept driving down our street with a kid out the car window slamming a baseball bat into everyone’s property. Where before, I saw a rotten looking mailbox, now I saw less cost when it’s finally destroyed.

So, back to our story…..

I’m following Nick through the house, expecting to see my mailbox on its side, with maybe a little dent in the car fender. My son has been driving for six weeks. We’ll have a talk about it and he’ll go to his swim meet. We’ll laugh about it when he’s 35 years old.

Heading up the stairs, I realize that many of my neighbor’s mailboxes look like this:

Holy brick-house, Batman! The front end of the car might be crumpled around that thing. Now I’m worried. By the time we hit the front door my pace is almost as fast as a cop headed for Dunkin’ Donuts.

me: Whose mailbox did you hit?

Nick: Huh? (he’s 16. I omitted most of the 16-isms for brevity, but had to leave one “huh?” in here.)

me: Whose mailbox?

Nick: Bill’s

me: Oh sh$#.

Bill lives across the street and has a mailbox similar to the one above. The front of our Saturn Aura is probably crushed in. Being a Saturn, it’s a collector’s item (that’s a joke, by the way. Some are apparent, others I’ll point out as we go.).

me: How did it happen?

Nick: I was trying to change a CD.

me: Nick! Don’t try to change a CD while driving. Keep your hands on the wheel. (I think I’m giving good parenting advice here, but I’m not. It turns out that my daughter–remember I said I had two driving? My insurance company remembers….and giggles out loud.–My daughter had a GLEE CD playing LOUD. I know because, when I turned on the car, it was still playing. My poor son. A Glee CD. The Horror. Forget the mailbox, I would have hit Bill’s house hard enough to end it all.)

Here’s what I see. Remember that as a recovering advisor for 200 families, it’s difficult to amaze me. I’ve pretty much seen it all.

Except this:

We call it “Wheelie!” or “Full-Sized Car Statue on an attractive brick base.”

My car is on two wheels (the left two if we want to be technical about it), and is TETTERING ON THE TOP OF my neighbor’s brick mailbox).

me: How the hell did you get the car all the way on top of it?

Nick: I don’t know.

Me: What did you tell me inside? Something’s wrong with the car?

Nick: Yeah.

Me: Understated. In social circles, that’s classy.

It took TWO wreckers to get the mailbox out from under the car. One to pick up the front end and another to drag out the mailbox.

Do you know that whole thing about people getting their 15 minutes of fame? The wrecker drivers all took pictures with their cameras “for the record.” I’m sure my car claimed its 15 minutes and more that night. You may have already seen this picture on Facebook.

So, in closing: please read my blog. Click on every advertising link. Next week I’ll have advice on how to deal with your car insurance company, and how to write big $%#!ing checks without shaking (much).

5 Biggest Refinance Concerns

October 5, 2011 by The Other Guy Leave a Comment

This will end up in the toolbox, but because only yesterday I posted an exciting post on the reasons why you should consider NOT refinancing, today I think it’s appropriate to post some of the concerns a good advisor might have when a client is considering changing a home loan.

There are so, so many variables to consider—to cliché this article as quickly as possible—your head will spin.

Let’s forget the smart-talk and just jump into the list:

1) Cash flow. This is the primary hook mortgage companies use to secure your signature on the bottom line. Like a fish to the worm, all a lender has to say is that “you’re gonna save $300 per month!” and we’re all lining up drooling for debt.

(Apparently the only offer credit card companies need to bait the hook is a free NASCAR blanket, but that’s another story.)

Comparing cash flow isn’t as important as knowing how you’re going to use your new free cash each month. If you plan to use the funds for a boat down payment, you may wish to reconsider. However, if you can set up an automatic payment to alleviate some other debt or save into your child’s college fund, I’m on board.

Final analysis: Just like you shouldn’t eat hamburgers every day just because they tastes good (lesson learned!), you shouldn’t choose to refinance based on cash flow alone.

2) Length of loan. If you’re close to paying off your mortgage, why would you sign up to start over again? I’ve seen people refinance to a lower rate and smaller payments, only to be in debt for 27 years longer than necessary. If you’re craving cash flow, are there other areas of your life that can be cut to avoid a mortgage refinance.

Final analysis: Compare terms before signing on the dotted line. Dying with debt isn’t as fun as your weird brother-in-law makes it sound.

3) Know thyself. Mortgages aren’t always about math and the “logical move.” I’ve met some pretty broke professors during my time advising families. Instead, often taking on new debt is about knowing yourself. Can you handle flexibility? Will you pay extra Here are some options:

– Use a portion of your savings to shorten the loan terms. Ask the lender if they’ll complete a rate-and-term mortgage, where your payment drops but the length of the loan stays the same. If not, ask what shorter terms are available. You may be surprised that the lender will offer you a lower rate on shorter-term loans.

– Throw your savings toward larger payments to pay the loan down early. Personally, I like this option. But once again, know theyself. This would have been the worst option for many of my clients.

Here’s why I like the last option: things happen. When you’re in financial trouble, I like the flexibility of being able to stop paying extra on the mortgage. I have a built-in safety net when times are tough…and over the next several years, who knows what’s going to happen?

I also trust myself to pay extra on the loan. Can you say the same? If not, lock yourself in on a shorter term to force yourself to pay more. You’ll be thankful you did.

Final analysis: What is your money personality? Are you desperately seeking boundaries or do you prefer long walks in the rain hand-in-hand with flexibility?

4) Terms. Mortgages, friends, aren’t free. I know. Before you swoon you may wish to sit down. But before you flip out and rush the refinance train, let’s compare costs with benefits. Does it make sense to save a few bucks if you’re going to spend much of your savings in expenses.

Here’s an easy, worthwhile math problem. If you’re going to save $200 per month and the refinance expenses are $2,400, it’s going to take a whopping two years before you realize a dime of cash flow savings. Additionally, you won’t wrap your arms around any interest rate savings until much later in the mortgage. For more on that topic, read this post.

There are no-point, no-cost mortgages available, but they aren’t free either. When a mortgage company agrees to let you off the hook on fees, they’ll recoup the money they lose by jacking up your interest rate a little. Many advisors prefer this again—although they know it’s a higher rate–for flexibility reasons. For me, it always depended on the client and how high the fees would have been if we’d just paid them.

In this market, I kind of like paying fees up-front. Knowing that historically rates haven’t bumped this low often, there’s a great chance I’ll never refinance again. By getting the fees out of the way now and maybe even paying points to get them even lower, I can save a ton of money now.

Final analysis: Fees are a reality. Decide where you’d rather get hit instead of letting the bank just smack you!

5) Total debt scenario. Many families separate their credit card debt, car payment and home loan from each other. My brother doesn’t like the different foods on his plate to touch. I’ve never understood either of these.

Think of yourself as a company. All that your board of directors is worried about is the bottom line. Create a total debt repayment strategy. Now you’ll analyze your home debt more wisely:

– Can I take care of some credit card balances while refinancing? Note: remember rule #3 above? If you’re just going to keep using the credit card, all you’re doing is taking short-term consumer debt and turning it into long-term debt against your house. If you can’t control your credit card spending you don’t want to lose your home.

– What is the refinanced loan going to do to my debt picture long term? Will I now have a mortgage in retirement? While my kids are in college? Are there ways to restructure your debt to avoid these upcoming cash flow crunches?

Final analysis: You read the entire map when headed on vacation, not just the next few miles. Include all the variables in your analysis and view your family financial picture as a business to make better decisions.

One area some may be surprised I didn’t include with these five factors. Don’t try to guess the future direction of interest rates. That’s betting, which is a losing game. Evaluate the current opportunity and whether changing course will help your family or not. Don’t get too interested in your refinance market horoscope.

Joe

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