What if you can't pay taxes now?

Your income taxes are due on April 18. What should you do if you can't pay what you owe?

File your tax return

First and foremost, even if you can't pay, you should file your tax return on time. The penalties for not filing a return are severe: 5 percent per month on the amount you owe, to a maximum of 25 percent reached after five months.

This is in addition to the interest the Internal Revenue Service charges for paying your taxes late. Filing your return -- even if you can't pay what you owe -- will at least avoid this penalty.

Borrow the money

The interest rate on a loan or credit card may be lower than the combination of penalties and interest imposed by the IRS. As a result, it could be cheaper to borrow money or use your credit card to pay what you owe.

You could try borrowing the money from a friend or relative, obtain a personal loan from a bank, or take out a home equity loan (assuming you have a home with equity). Using credit cards to pay should be a last resort since the interest is usually high.

If you can't get together enough money to pay all you owe, at least make a partial payment. The penalty for not paying your taxes on time, even though you filed a return, is smaller than that for not filing at all, but it's not negligible.

The IRS will charge you 0.5 percent per month on the amount you owe, to a maximum 25 percent reached after 50 months. You'll avoid at least a part of this penalty by making a partial payment when you file.

Request an installment agreement

Consider asking the IRS to permit you to pay what you owe over time in installments. If you owe $25,000 or less in combined taxes, penalties, and interest, you should be able to get an installment payment plan for up to 60 months just by asking for it.

You can apply online at the IRS website. However, if IRS computers show that you haven't filed all past due tax returns, you will not be eligible for an installment plan. Likewise, if, like most real estate professionals, you are self-employed, you must be current on your quarterly estimated tax payments for the current year.

If you owe more than $25,000, you will have to negotiate with the IRS to get an installment plan. You may also have to submit a financial statement.

Unfortunately, interest and penalties continue to accrue on your unpaid balance while you make your installment payments.

Seek an undue hardship extension

You can get an extra six months to pay the amount you owe by obtaining an undue hardship extension from the IRS. During this time the IRS won't charge you any penalties, but you'll still have to pay interest on the amount you owe.

You can get this extension only if you convince the IRS that paying your taxes on time will result in "undue hardship." Undue hardship means more than an inconvenience. You must show that you will have a substantial financial loss -- for example, you'll have to sell property at a sacrifice price.

If you have assets, you'll be required to provide security for your tax debt -- for example, a bond, deed of trust, notice of lien, or personal guarantee.

To obtain a hardship extension, you must file IRS Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, and provide detailed financial information.

Make an Offer in Compromise

If you have already filed your return, but are unable to pay your taxes, you have another option: making an offer in compromise (OIC), which the IRS describes as "an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed."

The IRS, like most creditors, would rather get something than nothing. Thus, you may be able to convince it to wipe our your entire tax debt if you pay a part of what you owe.

In some cases, the IRS has accepted as little as 1 percent of the amount owed on a tax bill. However, the IRS doesn't have to accept any OIC, and fewer than half are actually accepted.

The IRS will accept your OIC only if you convince it that:

• You aren't able to pay the full amount;
• There is doubt as to the amount of your tax liability (unusual); or
• Due to exceptional circumstances, payment in full would cause an "economic hardship" or be "unfair" or "inequitable" -- for example, you can't work due to health problems, or you'd be left with no money to pay your basic living expenses if you sold your assets to pay your tax bill in full.

Moreover, the amount of your offer must be equal to the "realizable value" of your assets plus the amount of money the IRS could take from your future income. For example, if your assets are worth $20,000 and the amount of your future income that's available to the IRS is $10,000, your minimum offer must be $30,000.

To begin the OIC process, you must file IRS Form 656, Offer in Compromise and pay a $150 application fee. You must also make detailed disclosures about your finances on IRS Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals. See the IRS website for details.

Inman News

How Property Tax Rates Work

It’s that time of year again, and some of you should be expecting your property tax bill for the first half of 2011. If that’s the case, then you’ll probably be wondering just how the government calculates property tax rates and why your bill seems to change every year.

Well, here’s an answer to your questions.

First, there is a difference between property tax rates and a property tax assessment. The rate is an overall percentage at which your property is taxed. The assessment is a valuation of your property’s worth, so that the government can determine how much money it is taxing.

States have different rules for conducting a property tax assessment, but the goal is to get an accurate value for the taxable property. This is usually determined by the replacement cost of structures and property, or the market value of the property calculated via comparison to similar properties.

Keep in mind that reassessment happens every few years, directly impacting property tax rates.

Once a property tax assessment has been conducted for an entire region, the local taxing entity then determines property tax rates.

Tax rates are determined in one of two ways, but are subject to percentage caps imposed by the law.

The taxing authority can choose to divide its yearly projected expenditures by the assessed value of all property in the region, assigning a portion to each property. It may also choose to estimate its budgetary needs based on different tax rates until it finds a reasonable rate.

Though no one enjoys fluctuating property tax rates—or taxes in general—they serve an important function. Taxes pay for local services, such as police and the fire department, as well as maintenance of infrastructure. They also pay for schools. So complain all you want, but please pay your property tax bill.

RISMEDIA

Is Your Property Tax Bill Too High?

Income tax, sales tax, estate tax, excise tax, alternative minimum tax...and just when you thought you'd paid them all...along comes your property tax bill as a homeowner. But did you know that the National Taxpayers Union estimates that as many as 60% of homes are assessed for too high of a value, resulting in an incorrectly larger property tax bill? Chances are good you might be in that group of people paying too much, so taking the time to review your property tax bill could save you a nice chunk of change.
The good news is that it's easy.
First, contact your local tax assessor's office and ask for someone in the reassessment area. Find out when appeals are heard, and how the process for submitting a property tax appeal works. Additionally, ask for a copy of your property card. Review the card and confirm that the basic information about your property is correct. For example, is the square footage and number of rooms for your home accurate? If the number is incorrect, the county may change the assessment without a formal appeal. If everything on the property card is correct but the assessed value still seems too high, your next step is to gather the following documentation to support an appeal. And don't be surprised if the assessed value is lower than what you think the market value for your home is--many counties use a formula which uses a percentage of market value to determine assessed value. Ask what the formula is, because an assessment which is less than market value still might be too high.If you have a current appraisal that supports the value being lower using recent market-value information, many counties will accept a copy of the appraisal with the appeal. If the appraisal is outdated, you can order a new one--just call me for a referral to a great appraiser. You can also visit the local assessor's office or search online, and look through the public records for other homes that have similar features to yours, but have lower assessments. Additionally, contact me to get in touch with a great Realtor who knows your area. They will be able to give you current market information for your neighborhood, and help you see how your market value and assessed value stacks up against your neighbors'.

$2,000 Property Tax Exemption

In these challenging financial times, don't forget that every household in New Mexico is eligible for a $2,000 head-of-family exemption off the value of your home for property tax purposes, BUT YOU MUST ASK FOR IT.
Call your County Assessor’s office to request the exemption.