Debt – most of us carry some debt. We use our credit cards and we have full intent of making the payments. However, sometimes things don’t go according to plan. Something happens in our lives that make it impossible for us to keep our commitment to pay. If you are in debt and you can’t make your payments, don’t panic, and don’t ignore it!
Ignoring your creditors may seem like the smart thing to do, after all you can’t pay them, but actually, it’s not a good choice. That’s because your creditors could report you to the credit bureau and that could affect many areas of your life. It might mean you are turned down for a job that you applied for. It might mean you have to pay more for insurance or you are refused insurance. It might mean you are turned down for a rental property. Bottom line – doing nothing is not looking out for you.
Instead, sit down and start to put a list together of your creditors that includes both secured and unsecured debts. You can begin by talking to them if you like and explaining your situation and why you can’t pay. Some of them may work with you, while others may not.
You’ll need to prioritize your debts so that you can decide which ones you will try to pay with your limited funds. For example, paying your mortgage and utilities would be more important than paying your credit cards, because you could become homeless and without power or gas. Then again, if your situation is dire you may walk away from your home. In that case, you would still want to keep the utility companies happy, as you’ll always need utilities.
The Debt Collection Agency Comes Calling
It won’t take too long before you hear from the debt collection agency, which is a third party agency that purchases other companies unpaid debts, and then tries to recover part of the amount. They can really wreak chaos in your life if you do not know what steps to take to prevent it.
How You Should Deal With Debt Collection Agencies
They are going to phone you morning, noon and night and at every number they think you might be reached at. Instruct them not phone and to only contact you in writing. Know your rights under the ‘Fair Debt Collection Agency Act,’ and make sure you understand the statute of limitations. The problem with dealing directly with debt agencies to determine a settlement leaves you with no one protecting your rights and looking out for you. It’s not a wise move.
What are Your Options?
The best option would be to contact a professional organization who has the ability to challenge, dispute and remove damage caused by a debt collection agency. Or, you could try to repair you credit on you own if you have the time and know how. Honestly, you are better off leaving something as important as your credit score in the hands of the professionals.
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Not paying your taxes on time entails various consequences. If you are having trouble paying your taxes in full, don’t let it hinder you in filing your tax return timely. Consider paying as large a percentage of the amount owed or borrow money from others in order to settle your tax liability in full. Filing a return and not including full payment can save you large amounts of penalties and fees. Moreover, payment plans are available and being on a current payment plans avoids IRS collection process which may include, property seizures, garnishments etc. Most CPA firms can advise you on these matters.
These are the ordinary penalties:
· “Filing Failure” penalty
5% per month on the amount of tax due on the return to a maximum of 25%
· “Payment Failure” penalty
.5% per month on the amount of your tax due on the return to a maximum of 25%
· Both “Filing Failure” penalty and “Payment Failure” penalty apply
The “Filing Failure” penalty lowers to 4.5% per month and “Payment Failure” penalty is
.5% per month. The combined penalty stays at 5%. The maximum penalty for both is 25%. Then, the “Payment Failure” penalty continues at.5% per month another 45 more months. Both penalties can go to a maximum of 47.5%.
Besides the penalties above, interest is charged on late payments. Also when you are self-employed, you take full responsibility for paying the taxes as money is earned through the year.
Payment extensions are provided when it can be proven that unwarranted hardship exists. Inconvenience caused by paying the tax isn’t enough grounds for unwarranted hardship. The taxpayer must show that paying the tax would cause significant difficulty and/or expense. For example, a fire sale, selling property at an extremely discounted price, since the person faces the difficulty of paying taxes.
When a payment extension is granted, interest is still charged but the “Payment Failure” penalty is waived. The payment extension is usually good for six months from the due date of the return. The IRS will lengthen time allowed for a payment extension due to some circumstances..
To apply for a payment extension use Form 1127. Form 1127 requires a taxpayer to provide detailed statements of; assets and liabilities, statement income for each of the 3 months prior to the due date of the tax return and statement expenses for each of the 3 months prior to the due date of the tax return.
Paying Income Taxes With Borrowed Funds
Borrowing money to settle tax obligations is an option. Here are some various scenarios:
· Loan From Individuals
Borrow from relatives or friends. Interest rates are probably lower.
· Loans From Banks Or Other Commercial Institutions
Interest on this type of loan is usually considered a non-deductible personal interest expense. Typically a financially troubled taxpayer has a hard time to qualify for this type of loan.
· Home Equity Loan
Interest rates may be lower than with other types of loans. The interest payments may be tax-deductible. This is usually the cheapest option.
· Credit Card
There are a number of companies approved to accept credit cards or debit cards to pay income tax. Note, interest charges may be high and is usually considered a non-deductible personal interest expense. On top of this interest, the companies approved to accept credit cards or debit cards to pay income tax charge a service fee.
Monthly Payment Agreement Request
File form 9465 to apply for a monthly payment agreement with IRS, this can be done online at WWW.IRS.GOV. This process can be done after a hardship extension expires. Form 9465 requires less information than Form 1127 regarding the hardship extension. No financial statements are required if tax due is under $50,000.
When the amount owed is more than $50,000 Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals is required. This form helps the IRS obtain detailed, information about you. Consider consulting a CPA Firm about allowable expenses and national living standards that correspond to Form 433-A.
There is a fee for the monthly payment agreement and it is deducted from the first payment if the request is approved. When the payment agreement request is approved, interest on any tax due date is still imposed. However the “Payment Failure” penalty is reduced to.25 % instead of.5% if the return is timely filed.
The monthly payment agreement has a fee of $120. The fee is reduced to $52 when a person permits the IRS auto debit from their account. In the event the taxpayer qualifies as a low-income the fee is reduced to $43.
Monthly Payment Agreements may be terminated if IRS thinks the probability of obtaining payments are at risk. The IRS will also terminate a monthly payment agreement if the financial information supplied was not accurate or complete.
Other reasons for terminating the agreement are the following:
• Failing to make a monthly payment.
• Failing to pay another tax liability when it’s due.
• Failing to provide updated financial information.
• IRS finds out that your financial condition has improved.
A written notice will be sent by the IRS 30 days prior to changing or terminating a monthly payment agreement. IRS will also provide the grounds for changing or terminating a monthly payment agreement. The requirement for written notice does not apply when the IRS believes the collection of tax owed is at risk.
Thus, it is very important that tax returns are filed properly even if full payment cannot be made. Options like hardships extensions or monthly payment agreements may be availed to prevent further charges, penalties and other serious consequences
Article Source: http://EzineArticles.com/9059857
Smart consumers will always want to steer clear of unnecessary debt. However, this does not mean that you need to renounce necessities or things that you yearn for in this life. The key is to be realistic. Develop sensible spending and saving habits. This in essence is called personal financial forecasting. Your plan must shape proper handling of money.
Develop spending policies that are easy to achieve. You must not fight the desire to spend. Instead, understand the need for reasonable expenditures without falling into financial liabilities. It is essential to convert said guidelines into routine practices. Make your decisions anchored on what is ideal for your personal funds.
Create a rational budget. Keep track of your earnings and how much you spend for at least three months. Keep a log book if possible and retain all receipts. Create expense categories such as food necessities, household utilities, clothes, travel, and entertainment. Find out ways to limit expenses that you can channel towards savings and paying off bills. Make it a point that you always have money for credit card balances and basic monthly purchases.
Strive to earn additional income. This is a sure way of not turning out short on your monthly budget. It is also the ideal way of controlling your finances. It is as simple as earning more if you want to buy more. Deposit more money to your savings account. You will surely need this in times of emergencies.
Choose the right credit card. This may not be an easy decision since a lot of cards proliferate in the market. In fact, you can find sales representatives of credit cards selling their products almost everywhere. However, credit cards are essential to consumers so you have to find a way of getting the suitable credit card without being over-stressed. It is important to identify the different categories of credit cards. Opt for a low interest credit card has very minimal interest rates. Purchases you make will not lead to unmanageable interest costs. Consumers, who carry over balances, will find this card as a practical option. It is a solution for consumers who are not capable of paying the full amount of monthly credits. The low interest card also offers huge savings and permanence while you settle your balances.
These are just some of the useful pointers in avoiding debt. Spend time to assess your present situation. Focus on saving rather than splurging. It will come in handy especially on rainy days.
A CPA who is approached by a client about one of the abusive arrangements and/or situations to be described and discussed in this article must exercise the utmost degree of caution, not only on behalf of the client, but for his/her own good as well. The penalties noted in this article can also be applied to practitioners who prepare and/or sign returns that fail to properly disclose listed transactions, including those discussed herein.
On October 17, 2007, the IRS issued Notice 2007-83, Notice 2007-84, and Revenue Ruling 2007-65. Notice 2007-83 essentially lists the characteristics of welfare benefit plans that the Service regards as listed transactions. Put simply, to be a listed transaction, a plan cannot rely on the union exception set forth in IRC Section 419A(f)(5), there must be cash value life insurance within the plan and excessive tax deductions for life insurance, in excess of what may be permitted by Sections 419 and 419A, must have been claimed.
In Notice 2007-84, the Service expressed concern with plans that provide all or a substantial portion of benefits to owners and/or key and highly compensated employees. The notice identified numerous specific concerns, among them:
1. The granting of loans to participants
2. Providing deferred compensation
3. Plan terminations that result in the distribution of assets rather than being used post-retirement, as originally established.
4. Permitting the transfer of life insurance policies to participants.
Alternative tax treatment may well be in the offing for such arrangements, as the IRS intends to re-characterize such arrangements as dividends, non-qualified deferred compensation (under IRC Section 404(a)(5) or Section 409A), split-dollar life insurance arrangements, or disqualified benefits pursuant to Section 4976. Taxpayers participating in these listed transactions should have, in most cases, already disclosed such participation to the Service. Those who have not should do so at the earliest possible moment. Failure to disclose can result in severe penalties – up to $100,000 for individuals and $200,000 for corporations.
Finally, Revenue Ruling 2007-65 focused on situations where cash value life insurance is purchased on owner employees and other key employees, while only term insurance is offered to the rank and file. These are sold as 419(e), 419A (f)(6), and 419 plans. Life insurance premiums are not inherently tax deductible and authority must be found in Section 79 to justify such a deduction. Section 264(a), in fact, specifically disallows tax deductions for life insurance, at least in some cases. And moreover, the Service declared, interposition of a trust does not change the nature of the transaction.
This is a type of tax whose charge is based on the amount of another tax being paid. In Canada, there are four types of surtax: federal income, provincial/territorial income, Ontario’s wealth and the non-resident.
Federal, Provincial and Territorial Income Surtax
The federal government and most provinces/territories use a staggered tax system with individuals and joint filers paying tax based on income thresholds. Some of these government agencies, including the federal government, charge surtaxes on top of these rates.
The amount of the surtax is determined by the amount of basic income tax paid. For example, someone with $40,000 of taxable income will pay 15% of this, $6,000, to the federal government. They will also pay an additional surtax of 15% on that $6,000, or $900. The marginal tax rate, the total paid to taxes, is $6,900, or 17.25% of the filer’s income.
Deductions apply to the basic income tax, but since this decreases the amount of income tax paid, it also decreases the amount that needs to be paid for the surtax. If the person in the previous example was able to deduct $6,000 of their taxable income for child support, they would then be taxed on $34,000. That works out to $5,100 in income tax and only $765 for the surtax. That works out to a marginal rate of $5,865, or about 14.6% of the filer’s full income.
While there are some exceptions, a “non-resident” is defined as someone who was in Canada for less than 183 days that tax year and didn’t emigrate to Canada or immigrate to another country. Since people in this situation don’t have an established province or territory of residency, they pay a 48% federal surtax to the Canada Revenue Agency in place of province/territory taxes. All federal taxes for non-residents only account income earned in Canada or from the sale of taxable property in Canada.
Usually, people moving into or out of the country must pay this surtax up front, then claim a refund after their emigration paperwork goes through.
Ontario’s Wealth Surtax
Starting July 1, 2012, a new tax came into effect for individuals and joint filers in Ontario earning over $500,000. Originally planned to help defer a planned reduction in heating oil tax, it finally passed as part of a plan to balance the budget; politicians promise this tax will be repealed once the budget is balanced sometime during the 2017-2018 fiscal year.
Although widely referred to as a “surtax,” it is merely a new tax bracket. Before, the highest tax bracket topped out at a rate of 11.6% for Ontario residents, but those who earn enough to fall into the new bracket, set at $509,000 and above for the 2013 tax year, must pay 13.6% in income tax.