TAX-TIME TRIALS

You can survive IRS season

by Josef Molnar

Illustration by Terry Klump

Ah, the thrills of adulthood, when the rites of passage give way to dead ends. Take your job as an example. Most of us were happy to quit mowing lawns or babysitting for change and get our first hourly jobs. But soon reality hit us from behind like a drunk driver, and we watched our paychecks whittle down to a couple of bucks and some change in the end.

No, it’s not all smiles when the Internal Revenue Service comes to town, and with April 15 just around the corner, taxpayers can be more nervous than a Chihuahua on a pot of coffee.

If you’re reading this, chances are you want for some practical advice on getting out of the last-minute tax grind, or maybe you want to do it better next time. Although the IRS can be a bit of a scrooge, it helps you out by making many of these answers within your reach.

ONLINE TIME

The IRS website, at www.irs.gov, is an excellent resource where you can find anything related to tax filing, from forms to tax codes. The site is a consortium of sites tied together as well as any behemoth can be, and although it might take you a while, you’ll probably find anything you need. You can even use their handy search engine.

If you’re familiar with computers and online transactions, you might consider filing your taxes online. The site also has links to its e-file (for most taxpayers) and Free-file (for low-income wage earners) pages. These options allow you to do everything online, saving you major hassles. You can also check the status of your claim online. The IRS says you will generally get your return direct-deposited to your account within three weeks if you file electronically or within a month if you have a check mailed to you, and e-filers may soon be able to get their direct deposits within a couple of days.

UNFASHIONABLY LATE

Obviously, the best way to avoid filing your taxes late is to be prepared in the first place, but that is in an ideal world. Fortunately, the IRS will let you file an extension if you need it, either on its website or by using Form 4868.

Kathy Hubbard, of Hubbard Financial Services, says about 20 to 25 percent of her clients who come in late each year end up filing for extensions for various reasons.

People with rental properties, who travel frequently and don’t have the time to fill out lengthy forms or need to claim travel-related expenses can find themselves in need of extra time to fill out their forms.

“There are people who just don’t handle paperwork well, but there’s usually a reason behind it,” Hubbard says. “There are a lot of people who can’t get their papers together, and those people extend their filing deadlines to get that extra time.”

Sending in the form will save you money by stalling late filing penalties the IRS usually tacks onto late returns. The IRS can be very inflexible when it sees late returns (see penalty information at www.outsmartmagazine.com). But as helpful as extensions can be, they only give you more time to turn in your paperwork. You will still owe late payment penalties on your taxes, but it’s preferable to paying for late filing and late payment.

“That is one of the big misconceptions about extensions,” Hubbard says. “Either way, you can be fined for a late payment, but you can also be fined for late filing if you don't file an extension.”

The extension will give you until August to send in your forms, but the IRS still requires you to estimate your income and the amount of taxes you owe, and in this case accuracy should be at the top of the list. If you are under the amount you owe them by more than 10 percent, the IRS reserves the right to invalidate the extension and charge late filing penalties. This underpayment penalty is another way taxpayers pay for being inaccurate.

In the meantime, if you see that you will end up owing something by August, you should probably send in a payment with the extension and a short letter explaining the reason for the check.

If August arrives and you still haven’t finished your return, you can file a second two-month extension. In the unenviable case that it is not done when October rolls around, you’re probably in need of some professional help. Hubbard says people who are still having trouble should consult a tax professional. As a last resort, you can estimate your returns based on receipts or check stubs rather than miss that final deadline.

If you miss your third deadline, you can still file your taxes, but expect the government to lay on the penalties in a big way if you owe anything at all. Most people don’t throw money away, but a few do in moments of insanity, as when they don’t file their taxes. Uncle Sam is a stingy coot, and you probably don’t want to give him any chances to keep what’s coming to you.

The IRS will allow you to try to claim your money up to three years after the tax year in question before it gives up and pockets the change. Those of you who missed filing for the 1999 tax year still have until April 15 to claim your money, but not a minute more. The government needs that money to pay for incidentals, like Stealth bombers and new chairs for all the president’s men and women.

WORK WITH A PRO

The majority of people who submit one or two W2 forms, as well as a home deduction or similar item, will probably not need an expert tax preparer. However, if you have a more complicated situation, such as rental property or have large taxable transactions from the sale of your mutual funds, you may want to visit a licensed professional.

“If you’ve just inherited your aunt’s house and you had to fix it up before you sold it, this is a situation where you might want to consult with someone,” Hubbard says.

Be careful when you seek help. Texas and the federal government do not regulate tax preparers, many of whom have full-time jobs in other fields, and will likely not be around on April 16, so you might ask your tax preparer if they are open for business after tax season.

“Anyone can hang out a shingle that says ‘We do taxes,’” Hubbard says.Tax expert Kathy Hubbard photograph by Yvonne Feece.

Remember that if you choose now to visit a professional with your shoebox full of crumpled receipts, paper-clipped notes and assorted 1099s, you probably will have to wait. This means you will have to file an extension and have your taxes filed in late spring at the earliest while the tax preparer works on the other late stragglers.

You will also want to have a clue about what is in the shoebox. Just because you kept your receipt to Home Depot doesn’t mean your tax preparer will know that you used that caulk and plywood to make home repairs on one of your rental properties (a standard deduction), so keep a list of what you have and why.

AFTER YOU FILE

Some of you are good at noticing when something is wrong. The rest of us are like the blonde in the horror movies who sees her disemboweled boyfriend’s foot sticking through the bedroom doorway and still peeks inside just to see if it’s what she thinks it is.

What happens if you go through your papers a month later and find the 1099 or W2 from that one-time deal? You can submit an amendment form, called a 1040X, to let Uncle Sam know how responsible you are. And maybe he’ll be more lenient with you.

“When you catch a mistake and self-report it,” Hubbard says, “they only charge the interest as a late payment, which would be half of the interest you would normally pay.”

According to Hubbard, if the IRS catches your error, you will pay the late payment penalty, as well as anything else they can find.

“They have a basket of penalties they can slap on there,” she says, “such as the 20 percent accuracy penalty to make you wish you had reported.”

Leaving out something happens to the best of us, but sometimes it’s because we don’t keep our paperwork together. Being late always costs you money. If do nothing else, Hubbard recommends that you at least find a common spot to keep everything together, such the empty drawer of a filing cabinet or a box in the closet.

“Half the battle is to find one place to keep everything,” she says. “It’s such a nuisance to do it all at the end of the year.”

Some people, like the aformentioned self-employed people and business owners, have to keep track of everything. Some things can always get lost. You might consider keeping track of your mileage, receipts, and checks in a ledger or by using folders with labels for the different items that go in them.

It always helps to be prepared, but sometimes disasters spring up, as when Tropical Storm Allison flooded all of those homes in Houston and elsewhere. A little-known court case allows you to reconstruct your records based on assumptions, like how much you would normally spend on gas, how much you made based on check amounts you remember, or on your bank account. Again, although filing your tax return may be the least of your worries, you will probably want to check with a tax professional to be sure you do it correctly.

If you can find a way to make keeping track of your forms, preparing and sending them out every year a little easier, then maybe April 15 will seem less like the guillotine and more like a visit to the mechanic: a little uncomfortable, but very necessary.

Josef Molnar reported on the Lawrence and Garner v. Texas case in the March issue.

If you have any comments about this article, please email them to letters@outsmartmagazine.com.