As we return to blogging from a very long vacation.....
The Monday October 21, 2019 Wall Street Journal Wealth Management section lead article featured “Nine Myths About Credit Scores.” I won’t list all nine myths. Frankly some myths are stating the obvious. “Credit reports are accurate” and “Selecting credit while using your debit card for a purchase is good for your credit score.” I learned something though.
From the article:
MYTH: If I pay my bills on time, that’s all I need to worry about
“For many consumers, the assumption is that on-time bill payment is all that matters when it comes to a good credit score. But that assumption forgets about the importance of credit utilization, which is the percentage of debt you owe compared with the total available credit that’s been granted to you.
Utilization is one of the most important components of your score. If your credit cards are maxed out, your score won’t look good even if you’re paying promptly. A rule of thumb is to use less than 30% of your available credit each month and ideally less than 10%.
Another key strategy to consider is calling your card issuer to ask for a higher credit limit. If successful (and 85% of the time it is, according to CreditCards.com, a credit-card comparison site), the request would instantly lower your utilization.
“This is one of the fastest, easiest, no-cost ways that anyone can help their score,” says industry analyst Ted Rossman of CreditCards.com.”
Which got me to thinking. There is no organization that strikes more fear than the IRS. After all it is the largest, most powerful collection agency in the world. The IRS has powers to take your money and / or property without a court hearing. Come to think about it, so does the Illinois Department of Revenue and the Illinois Department of Security for that matter. In my opinion no agency deserves a myth list than the IRS.
Five Myths About the IRS.
- The IRS is an all powerful, all watching, efficient organization, watching everything you do. Nothing could be farther from the truth. Saddled with 1960s era computer systems, reduced budget, a smaller workforce, and an impossible Obamacare mandate to monitor every American’s health care coverage on a monthly basis, efficiency is not an IRS trait by any measure. I like to tell clients that patience is required when they receive an IRS notice. IRS doesn’t open their mail. Doesn’t answer their phone 30 percent of the time. No longer lets you walk in their offices without an appointment. There is no longer a revenue officer based in Springfield. It seems that IRS moves at glacial speed. Examinations take years not months to settle. And the tax court system is so clogged, if you have the nerve to wait the IRS out, you have a very high chance of a favorable settlement because the IRS does not have the means to prepare or conduct a trial for us small fish. Despite all of this, because of their lien and levy powers, IRS is an agency that remains all powerful, and requires respect. It is just not that efficient doing the stuff that they do.
- If you owe the IRS a significant amount of money, the Offer in Compromise Program (OIC), so much advertised in the media, sure seems the way to go. Well not really. Any taxpayer that files for an OIC stops the clock. IRS has ten years to collect past due taxes. Every tax return has an official statute date. That statute date starts the ten year clock. (In contrast, Illinois has a much longer collection period ...25 years. This extraordinary time period to keep a debt valid, and collectible, is so bad for the Illinois taxpayer, clogging the collection bureaucracy at the Illinois Department of Revenue, and frankly, is just unfair for a non judicial ordered debt, that may or may not be correct. By the way the statute of limitations for Illinois consumer debt is either five of ten years. But I digress.) Filing the OIC stops the collection clock. Considering the chances of qualifying for an OIC are not very good. Less than 40 percent of offers are accepted by the IRS. It takes a very long time to get IRS to work your OIC. Two to three years by our experience. See number one above. You might be better off trying to make your account either uncollectible because of your financial or health situation or consider an IRS payment plan. But caveat emptor.
- IRS offers a payment plan to pay past due taxes that you should take advantage of. By law if you owe $5,000 or less, IRS will have to set you up on a payment plan. In reality IRS offers payment plans for taxpayers that owe up to $100,000. See number one above. Again because it has such problems getting things done, $100,000 payment plans are easier to administer than enforced collection. Payments are based on your finances. IRS liens may be filed on balances over $50,000, or maybe not. (Liens pretty much destroys your ability to buy or sell real estate, but interestingly enough are no longer listed on consumer credit reports. Principally because liens are notoriously reported inaccurately. Like credit reports. Hear that Illinois?) If you enter into a direct debit payment agreement with the IRS, your bank account is debited automatically by the IRS. Make five payments successfully, the IRS will withdraw the tax lien they filed, and life becomes good again. Sounds great. What is the rub? Owing the IRS is not like owning any other creditor. That is because the principal increases while you are paying off the debt. Any IRS debt includes tax owed...the principal…, interest set by law, and penalty. It is the penalty or should I say penalties, that cause the problem. IRS assesses penalties, whether it is for failure to file, failure to pay, underpayment penalty, or even negligence penalties for example, on a monthly basis for as long as the tax liability remains unpaid. IRS says that the average taxpayer will pay 140 to 150 percent of the original tax owed under their payment plans. If you ever find yourself in the unfortunate situation of owing taxes, please do everything you can to find other sources to pay the IRS. It took me more than 30 years to figure it out. The system is fixed. You have to pay your taxes. If you don’t, you will pay dearly.
- IF you cannot pay the IRS on April 15th you should file an extension. This tax season we filed more extensions than ever before. Some taxpayers had record keeping issues, others had personal reasons, some just can’t their things together, however the primary reason for filing an extension seems to be a lack of funds to pay current tax liability. An extension to file is not an extension to pay. Your taxes are due and payable on April 15th. Not filing creates additional penalties that you wouldn’t have to pay if you had filed on April 15th. Creating an additional liabilities when you are struggling with money right now doesn’t make a lot of sense. The IRS is the most expensive creditor you will ever borrow money from. See number four.
- An office in the home deduction means instant audit. There was a time when this myth was actually pretty close to the truth. However, with home offices becoming increasingly prevalent, this one-time fact has become predominantly fiction. Back in 2013 Congress changed the law and created a safe harbor calculation for taking a home office deduction. The home office has become legit. A real victory for the taxpayer. There’s no need to be afraid of claiming a legit deduction. The one thing to be wary of is making sure your claim actually falls within the IRS definition of a home office. We have a link to the IRS discussion of the home office safe harbor discussion on our website 1taxes.com. Speaking of audits, currently the IRS audits less than one half of one percent of the taxes filed. 244 million tax returns were filed in 2015. 1.2 million returns have been or will be audited. So .6% of all returns filed in 2015 were or about to be examined by the IRS. Less than one percent. In all honesty the odds are with you.
