WASHINGTON --- You've lost your job and your mortgage company is threatening foreclosure. Then the tax man comes calling. What's a person to do?
Don't ignore the Internal Revenue Service.
"The most important thing for people to do, even if they owe money, is to go ahead and file that return," says Terry Lemons, a senior spokesman for the IRS.
The average refund last year was $2,429.
"That's a lot of money for people who are facing hardship," he said. "We encourage people to take a look at their taxes, file electronically and use direct deposit."
You can get your refund in 10 days that way, versus four weeks or longer if you file by mail.
The IRS considers taxation a "pay as you go" system, said Bob Meighan, the vice president for the Consumer Tax Group, part of Intuit Inc., which publishes the tax preparation software TurboTax. "Most Americans are current in tax liability as they are earning income."
But if your annual income declined because you lost a job or had other changes in your financial situation, your tax bill is likely to be lower and you could be due a larger refund.
You might find yourself eligible for a broad range of credits that you didn't qualify for before. Among them: the Earned Income Credit, education credits and the Recovery Rebate Credit.
The stimulus checks that people received last year actually were an advance payment on the Recovery Rebate Credit. Initial eligibility was determined based on 2007 tax returns.
If your financial circumstances changed, you might qualify for the rebate now, even if you didn't when the initial payments were made. If you did get a check, you also may qualify for an additional credit if you added a child to your family in 2008.
Through 2008, Treasury processed more than 118 million stimulus payments worth about $96 billion. The IRS expects about $10 billion in Recovery Rebate Credits in 2009.
The credits are $600 for those filing individually, $1,200 for joint filers and $300 for each child.
The Earned Income Tax Credit was designed to help low-income workers by offsetting part of their Social Security and Medicare taxes. Since it boosts take-home pay, it is meant to provide an incentive to work. The maximum income limit is $41,646. That declines based on filing status and the number of children in the household. The maximum credit for 2008 is $4,824, up from $4,716 in 2007.
Mr. Lemons says the IRS is paying close attention to the hard times and wants Americans to take advantage of every credit and deduction due them.
For those who owe back taxes, the IRS is offering assistance.
"We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," IRS Commissioner Doug Shulman said in a statement as the filing season began. "We want to go the extra mile to help taxpayers, especially those who've done the right thing in the past and are facing unusual hardships."
Taxpayers who lost a job, rely solely on Social Security or welfare or who face "devastating illness or significant medical bills" might be able to have collection actions suspended.
For those facing financial hardship, missing a payment on an installment agreement with the IRS won't necessarily result in suspension of the agreement. The agency said people should call the IRS to discuss their situation.
For people who find they don't have the money to pay their tax bills, experts have this advice:
- Pay as much as you can when you file your taxes.
- Consider asking the IRS for an installment agreement to pay over time. There is an application on line. "The general rule is that if your bill is $25,000 or less the IRS will be pretty amenable to an installment agreement," said Jackie Perlman, a senior tax researcher at H&R Block Inc.
- Look for other sources of payment, including putting the bill on a credit card. But beware of the interest rate the credit card company charges -- it could be higher than the one charged by the IRS.
- Some 401(k) plans allow hardship withdrawals to pay taxes. However, these distributions are taxable and may be subject to penalty.
- Ask the IRS for a short-term hardship extension, using form 1127. However, the installment payment or other extension options are usually easier to obtain.
- Offer to settle the tax liability for less than the full amount owed. This "offer in compromise" is difficult to obtain. To get it, there must either be doubt that the full amount could ever be collected; doubt that the tax liability is correct; or what is called "effective tax administration," with exceptional circumstances. To be eligible for compromise in such a case, the taxpayer must demonstrate that paying the full amount would create economic hardship or would be unfair and inequitable.