Tuesday, August 24, 2010

Pay your taxes off at 10 cents on the dollar?

These claims are touted on cable TV and radio ads frequently, and at times we have received inquiries from clients about them. Our advice is usually unpleasant, but pragmatic: If you owe the money and have the ability to pay (whether you want to or not), you will not qualify for any special negotiated settlement, and to try and get one will only drag the process out and drive your ultimate costs up.

This was reinforced Monday with the announcement from the California Attorney General’s Office of a lawsuit filed against the nation’s largest tax resolution law firm. The suit alleges that the firm engages in unfair business practices, defrauds customers, makes false promises while taking large up front payments and provides little or no help in lowering tax bills. The lawsuit says that one ad featuring three individuals and claiming to have saved them $86,000 is misleading since all three still owe the IRS the tax plus interest and penalties and have only temporarily delayed their payments.

The best advice for anyone owing back taxes: Take the steps necessary to minimize any penalties incurred, and pay off old balances as quickly as possible. Interest and penalty assessments can in many cases exceed the amount of original taxes owed had they been paid on time. The government is not a cheap lender, and in collection cases they are not here to help. While they will work with you to facilitate payment of back taxes, your best interest in the long run is never incurring any penalties or interest by keeping your payments current.

Tuesday, August 10, 2010

Taxpayers get Burned

In a recent court case, the court struck down a tax deduction for a couple who donated their house to a local fire department. It seems they were in need of the house being removed from their property, and the fire department was in need of a burning house to train in. The couple obtained an appraisal of the house at $287,000, donated the home to the fire department, who burned it to the ground and trained their firefighters. The couple deducted the appraised value as a charitable deduction.

The district court denied the charitable deduction, but not on theoretical grounds. The deduction was denied because the appraisal of the property was faulty. The appraisal failed to lay out specifically the dates of the donation, the qualifications of the appraiser, the terms of the agreement with the fire department, and to state that the appraisal was done for tax purposes. These are all requirements spelled out in regulations. Whatever merit there might have been in taking the deduction for the house, it was lost because they failed to follow the rules and document the deduction properly.

The punch line: If there is big money at stake, it pays to do right, otherwise your tax savings might well go up in flames.