Taxpayer wants IRS to apply 2007 refund

[Booger]

Client owes $$$ to the IRS for an assessment on their 2005 return.

Client would like the IRS to apply their 2007 refund against this amount.

Will the IRS automatically do this, or should the client include another

form with their paper-filed 1040 for 2007 that requests the IRS to do this?

No e-file.

Booger

[fredazcpa]

if the irs has the assement on the books, the irs will take the refund, if you efiled, you would now right away with the debt code, also if efiled, the cients payment is posted faster, there less interest

[Cathy]

if the irs has the assement on the books, the irs will take the refund, if you efiled, you would now right away with the debt code, also if efiled, the cients payment is posted faster, there less interest

The rebate will also be automatically applied to the tp's outstanding balance.

[JohnH]

This raises an interesting question I've been pondering. Client owes about $1,000 on a MFJ return for 2007 and says he won't be able to pay it by Apr 15. Wants to file an extension to give him time to come up with the money. He knows there will be a FTP penalty and some interest, both totaling about $14/month, but of course the extension will avoid the $50/month FTF penalty.

I'm advising him to go ahead & file the return with no payment (or a token payment if he is inclined to do so - I like the token payment because the canceled check is good evidence back-up that the return was processed). The FTP penalty & interest will still be the same ($14/month), but the balance will be paid off by his $1,200 rebate so he doesn't need to sweat trying to get the money together to pay the balance and then waiting 2-4 months for the rebate check to show up. Anybody disagree?

[joelgilb]

This raises an interesting question I've been pondering. Client owes about $1,000 on a MFJ return for 2007 and says he won't be able to pay it by Apr 15. Wants to file an extension to give him time to come up with the money. He knows there will be a FTP penalty and some interest, both totaling about $14/month, but of course the extension will avoid the $50/month FTF penalty.

I'm advising him to go ahead & file the return with no payment (or a token payment if he is inclined to do so - I like the token payment because the canceled check is good evidence back-up that the return was processed). The FTP penalty & interest will still be the same ($14/month), but the balance will be paid off by his $1,200 rebate so he doesn't need to sweat trying to get the money together to pay the balance and then waiting 2-4 months for the rebate check to show up. Anybody disagree?

Must file the return on time to avoid penalties. An extension does not extend the time to pay and therefore does not avoid the penalties. Set him up with a 9465 installment agreement and some small amount and he can pay more when he gets it. This will keep IRS off his back.

And I believe the 9465 will be automatically accepted if its for 12 months or less.

Joel

[JohnH]

Joel:

I think you're overstating the penalty issue.

The extension is valid even if nothing is paid. It purpose is to avoid the 5% per month FTF penalty for the first 5 months.

The only remaining penalties are the 1/2 of 1% FTP penalty and the interest at about 8% APR, which will be due if paid after April 15 no matter how it's done. (Plus the estimated tax penalty, but again it's due whether or not an extension is filed). I use a figure of 1.25% per month to get a rough idea of the true cost of paying after April 15 - it usually comes out to be a little over the actual amount.

Filing the 9465 in a case like this is out of the question - the fee for the 9465 alone is too high (it can range from $43 to $105). And IRS will usually grant 120 days to pay just by making a phone call. I only suggest the 9465 if the taxpayer owes a lot of money and needs more than 6 months to repay. Approval of a 9465 is usually automatic if the taxpayer is otherwise compliant, owes less than $10,000 total, and asks for 3 years or less to repay. In any event, the 9465 should never be used for short-term repayment situations.

[kcjenkins]

I agree with John, the 9455 is not a good idea when the t/p expects to be able to pay it off in two or three months. They can just send a portion with the return, then when they get the bill for the balance, they can pay some more, and then when they get the next bill, for the remaining balance, pay that. Saves the fee, and has the exact same effect. As long as they always respond promptly to each new bill, and pay a reasonable portion of it, the IRS will not do anything except send another bill each time. I only file a 9455 when they need a year or more, since they added on those high filing fees to get the installment agreement.

[Cathy]

This raises an interesting question I've been pondering. Client owes about $1,000 on a MFJ return for 2007 and says he won't be able to pay it by Apr 15. Wants to file an extension to give him time to come up with the money. He knows there will be a FTP penalty and some interest, both totaling about $14/month, but of course the extension will avoid the $50/month FTF penalty.

I'm advising him to go ahead & file the return with no payment (or a token payment if he is inclined to do so - I like the token payment because the canceled check is good evidence back-up that the return was processed). The FTP penalty & interest will still be the same ($14/month), but the balance will be paid off by his $1,200 rebate so he doesn't need to sweat trying to get the money together to pay the balance and then waiting 2-4 months for the rebate check to show up. Anybody disagree?

John,

Yours is the EXACT approach I have already taken with several of my clients. I advised them to wait until April to mail the returns, small token payment (for the same reason as you have stated)....certified mail, return receipt requested. The rebate possibly will be credited to the balance due before the client receives the first balance due letter from IRS.

Cathy

[GeneInAlabama]

Filing the 9465 in a case like this is out of the question - the fee for the 9465 alone is too high (it can range from $43 to $105). And IRS will usually grant 120 days to pay just by making a phone call. I only suggest the 9465 if the taxpayer owes a lot of money and needs more than 6 months to repay. Approval of a 9465 is usually automatic if the taxpayer is otherwise compliant, owes less than $10,000 total, and asks for 3 years or less to repay. In any event, the 9465 should never be used for short-term repayment situations.

I wonder if there will BE a rebate until the tax is paid, even if the rebate would be more than the tax owed. Just wondering. The IRS doesn't always do things that make sense. I imagine that a lot of people are planning on using the rebate to pay their taxes. The purpose of the rebate is to get people to spend more money to stimulate the economy, but the government does do a pretty good job of spending our money for us.

Gene

[joelgilb]

OK, John, technically you are correct. On examination, however, the Service could invalidate the extension if it determines that the taxpayer failed to make a "bona fide and reasonable" estimate of its liability based on the information available at the time the request for extension was made (Crocker, supra). Regs. Sec. 301.6651-1(C )(4)(ii) -- which provides that for purposes of the failure-to-pay penalty, reasonable cause is presumed if the amount of tax shown on the extension is at least 90% of the amount of tax shown on the taxpayer's return

With current agressive posture at IRS I would still think it is safer to file a return by 04/15/08.

As for the 9465, I agree with you there, but I tend to take a conservative approach and try to avoid the IRS issuing notices. Further, everytime a notice is received, you know the client is going to call his tax adviser and ask to have it looked at, running up fees and wasting our time for no good reason.

Joel

[JohnH]

Joel:

In this scenario, in my original post I was advocating filing the return because of the special circumstances with the rebate.

However, given the same situation in the absence of the rebate I would certainly advise them to file the extension.

So let's clarify one other important point with respect to filing an extension and then I'll leave this alone.

For a client who files an extension, I would never advocate filing the 4868 with a low-ball estimate of the TAX DUE. However, there is a separate line for the AMOUNT PAID precisely for this reason. It is perfectly OK to enter $1,000 on the "Tax Due" line and $25 on the "Amount Paid" line. The extension is completely valid, there will be no FTF penalty, and the IRS cannot invalidate the extension retroactively because the estimate of "tax due" was correct. There is zero risk to the client by filing an extension in this manner. Furthermore, if they owe and can't pay by April 15, there is going to be follow-up paperwork no matter what one does.

Finally, the IRS contradicts itself by stating that "an extension of time to file is not an extension of time to pay", but I think they do that intentionally. Allowing the extension to be filed without full payment is effectively granting the taxpayer an extension of time to pay - at a cost that is higher than second mortgage rates but lower than credit card rates. I think it's a brilliant collections practice on behalf of the IRS to have it both ways. They get the taxpayer into the system so they can know he is out there, they start the clock running on the disclosure of the liability, they collect interest on the unpaid balance at an effective APR of about 13 -14%, and they spook taxpayers and preparers into thinking there is no extension of time to pay.

[Jack from Ohio]

Here is the answer about using the rebate to pay tax owed from 2007:

Q. I owe some money on my 2007 tax return but the amount I owe is less than my expected stimulus payment. Can I wait to pay the balance due and simply let my stimulus payment cover it?

A. You should file your 2007 return and pay the entire balance due by April 15. You should not wait for your economic stimulus payment to offset the balance due. If you wait, penalties and interest will accrue between April 15 and the date the balance is paid, even if it is ultimately covered by the stimulus payment, which will not be available before May. [New 2/28/2008]

http://www.irs.gov/newsroom/article/0,,id=179181,00.html

Just tell your clients to expect interest and penalties which can be avoided by paying timely. It is amazing to me the lengths people will go to, to avoid paying something they legitimately owe.

[JohnH]

Of course the IRS is going to say that.

But if the client doesn't have the $ to pay, the statement is meaningless.

And of course none of this matters to the client who has the money to pay.

As far as the penalties & interest are concerned, they aren't really that bad in the total scheme of things.

They will pay about 1.25% per month in combined P&I - higher than second mortgage rates but significantly lower than credit card rates.

IRS knows that many taxpayers & tax pros will recoil from the word "penalty" so they use it very effectively.

[RoyDaleOne]

I did not check this, however, I recall that if 90% of the tax on return is not paid with the extension the IRS will charge the failure to pay penalty on the amount from April 15 forward, plus interest.

The failure to file penalty is as I recall 5% per month up to 25% and the failure to pay penalty is 0.5% or 1.0% per month up to 25%

[JohnH]

Yes, and no.

The estimate on Line 4 of the 4868 is supposed to be accurate, and in theory the IRS can retroactively invalidate the extension if this figure is grossly wrong. In over 30 years, I've only seen this happen one time (an extension not prepared by me), and in that case the guy showed no tax due when in fact he had about $6K due. So line 4 is required to be accurate - enter an intentional understatement on that line and you can have a problem.

However, failure to pay the estimated amount due on lin 6 (or underpayment of that amount) will NOT invalidate the extension. Otherwise there would be no reason for the 4868 to have a line 7 (Amount you are paying). Line 7 Instructions make this very clear >>If you find you cannot pay the amount shown on line 6, you can still get the extension. But you should pay as much as you can to limit the amount of interest you will owe. Also, you may be charged the late payment penalty on the unpaid tax from the regular due date of your return. <<< Incidentally the FTP penalty is .5%, plus interest currently at 8% APR. Since neither interest nor penalty is deductible, they are really both the same, so the total cost is roughly 14-15% APR, or about 1.25% per month.

This is why I marvel at how IRS works their smoke & mirrors on the extension rules. They allow the filing of a valid extension without full payment, but word their pronouncements in such a way that people are unsure about what they can and cannot actually do while still being in compliance. I believe they allow the filing of an extension without payment because they have a strategic purpose. If the person owes and has no means of paying, then there's a tendency to just not file. IRS doens't know anything about their situation and may spin its wheels trying to scout out the non-filers who owe significant money because they are buried among the non-filers who owe little or nothing. But if the taxpayer can file an honest extension with a partial payment or no payment, thereby completely avoiding the 5% FTF penalty ( a strong incentive), then they are now in the system and the IRS has a means of tracking them. Smart IRS tactics IMO, but tax preparers shouldn't allow IRS to buffalo us into not giving our clients the best advice for their individual situations.