By HELEN HUNTLEY
© St. Petersburg Times, published February 11, 2001
Even if you can't pay taxes, you must file a tax return
Q. My husband and I invested several hundred thousand dollars in a company that is now in Chapter 11 bankruptcy. The bulk of the money is in individual retirement accounts. Now Uncle Sam wants his taxes on the money we were able to withdraw from our IRAs in 2000. Unfortunately, we cannot pay because we invested all the money we had. What will happen? Can the government take our home and other things? What happens in the future when my husband will be required to make IRA withdrawals but we cannot withdraw the money?
A. Whatever else you do, file a tax return even though you cannot pay. Your IRA custodian will report your withdrawal to the IRS, and failing to file is a criminal offense that can result in additional penalties.
You need to talk with a tax professional such as a CPA or enrolled agent about whether installment payments or an offer in compromise would be appropriate in your situation.
The IRS can file a lien against you covering your house, cars, bank accounts and other property, including your IRA.
"Those things only happen if you bury your head in the sand and don't deal with the problem," Clearwater CPA W.H. Simon said. "The IRS is not anxious to go out and seize property, but when people will not cooperate with them, they can."
Even though the homes and retirement accounts of Floridians are protected from creditors in bankruptcy, they do not enjoy the same protection from the IRS, Simon said.
The future required withdrawals are much less of a concern. Your tax will be based on the value at the time of withdrawal. If that isn't much, the tax won't be much. In fact, if the whole account isn't worth much, the required withdrawals will be minimal.
Also keep in mind that IRA withdrawals can be in the form of securities, perhaps an appropriate choice if your account is filled with not-very-marketable securities. The one potential difficulty is that not all bankrupt companies have a transfer agent, which you need to transfer securities out of an IRA.
Q. I had a problem that cost me $24 in additional property tax charges, which could have been very serious if I itemized deductions for my income tax. I mailed my property tax check at about 6 p.m. Dec. 31. That was a Sunday and the next day was a holiday, so the letter with the check did not get postmarked until Jan. 2. The above goofiness could repeat itself April 15th since that is a Sunday. Perhaps your readers should know about the postmarking policy of their local post offices.
A. Any time you are planning an important last-minute mailing, it is a good idea to check the policies at your local post office before you drop your letter in the slot. Even on weekdays, a mailing after 5 p.m. may not get that day's postmark.
The good news is that the IRS will give you and other taxpayers an extra day to file your returns this year to allow for the fact that the 15th falls on a Sunday. That means your return doesn't have to be postmarked until the 16th.
Q. What can I do to reduce or eliminate taxes on my Social Security benefits as seen in ads?
A. Reduce your income.
I have not seen the ads, but my guess is that they are selling insurance products that give you the benefit of tax deferral on your investment earnings.
Keep in mind that there is no such thing as a free lunch. There are fees and usually withdrawal penalties in exchange for that tax deferral. With fixed annuities, watch out for high teaser rates and long surrender penalties. You could find yourself locked in at a lower yield than you could earn on a CD, even after paying the taxes.
Taxes should be a consideration in investment decisions, but never the driving force.
Online money map
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- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, St. Petersburg Times, P.O. Box 1121, St. Petersburg, FL 33731, or to email@example.com by e-mail.
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