Thursday’s need-to-know money news

Today’s top story: 6 late-filing tax mistakes you need to avoid. Also in the news: Why paying taxes by credit card probably isn’t a good idea, collection agencies are getting another shot at your back taxes, and filing a tax extension to buy more time.

6 Late-Filing Tax Mistakes You Need to Avoid
Common mistakes to watch out for.

Paying Taxes by Credit Card Probably Isn’t a Good Idea
You’ll pay for the convenience.

Collection Agencies Get Another Shot at Your Back Taxes

Don’t Panic, File a Tax Extension to Buy More Time
Take a deep breath.

Q&A: The legitimacy of tax reduction companies

Dear Liz: I fell behind on making my quarterly estimated tax payments for a long list of reasons, and when I file my return, the IRS will find out. I have heard they can seize your IRAs, which I have but do not want to cash out to pay.

I found a service on the Internet with good references and no bad reviews. The company said it can help get a payment program and often a reduction in the amount owed. It seems worth a couple thousand dollars to try it. Your thoughts?

Answer: There are a number of reasons why a company might have no negative reviews online. Maybe it’s a great company. Or maybe it’s not, but it just launched or took over a legitimate firm with the intention of fleecing as many people as possible.

Don’t be persuaded by the idea that the company might reduce what you owe. Settlements aren’t impossible, but the taxpayers who get them (typically after long and drawn-out battles) are those whose financial situations are dire and not expected to improve.

The IRS has many, many ways to collect its due and won’t just roll over because you don’t want to pay.

In any case, you don’t need to hire someone else to set up a payment plan for you.

If you owe $50,000 or less as an individual or $25,000 or less as a business, you can request an installment plan online and get an immediate response. If you owe more than those amounts, you can request an installment agreement using Form 433F.

The costs are low. If you can pay your balance within 120 days, the plan is free. Otherwise you’ll pay $52 for a direct debit agreement or $105 for a standard or payroll deduction agreement. Lower-income taxpayers can get a reduced fee of $43.

For more, visit http://www.irs.gov/Individuals/Payment-Plans-Installment-Agreements.

If you can’t pay your balance in the allotted time, you may need to hire some help. You can get referrals to CPAs who can represent you in front of the IRS from www.aicpa.org.

Q&A: Using a bonus to pay off debt

Dear Liz: I’m expecting a bonus this year of about $10,000. Should I pay off $6,000 in back taxes on which I’m currently paying $428 per month on a never-ending installment agreement? Or would it be better to pay off one of our $5,000 credit cards accruing 19% to 22% interest?

Answer: You didn’t mention some important factors: How much you owe on the credit cards, what the interest rate is on that installment agreement, or why you’re planning to use only about half of your bonus to pay off debt instead of at least 90% of it.

What is clear, though, is that you’re having some trouble living within your means. A fee-only planner who charges by the hour could help you figure out a budget. Online resources such as Mint.com or personal finance software such as Quicken or You Need a Budget also might be helpful. Another low-cost source of help would be a credit counselor affiliated with the National Foundation for Credit Counseling (www.nfcc.org).

All things being equal, it’s usually best to pay off your highest-rate debts first. If you owe so much on credit cards that you have no hope of paying them off within five years, however, you might be wise to spend some of your bonus consulting a bankruptcy attorney.

Thursday’s need to know money news