09 July 2007

Taxing time again

In April my solution to the tax situation was to write large cheques, file an extension of time to file and try not to feel too sorry for myself. Not a bad strategy especially since I was in day job deadline hell.

Since then I've had a few more of those lovely deadlines, received (thank you) a letter from the insurance company acknowledging that it was their error not mine and crunched some numbers. What I haven't done is the filing of the return or the contact the IRS and FTB for clarification of what paperwork to file in support of my position that the under withholding is not something I should be penalised for.

I woke up today feeling lousy enough to take a sick day.

Since the day was not going to be a fun one and the deadline to file is Friday, I figured I might as well make it a really bad day by doing my homework and making the calls.

For as long as I've lived in CA one of the things that boggles my mind is how good they can make the feds look by comparison. Today was no exception.

True, the FTB gives you an automatic extra 3 months to file your return (a good thing) but the rest of the story is not a pretty one.

The underlying problem is that the mistake involves under withholding which, if I were an estimated tax payer or someone with business or other income that might arguably need to make estimated tax payments, I would fill out and file a 2210 to show that I did make the appropriate payments and owe no penalty/interest because my tax liability falls within the 90 and 110 percent rule.

The underlying premise on all of this is that the government wants 100% (or more) of all the tax monies you may owe when you file on 15 April in their coffers before the end of the tax year. This provides them with an interest free loan over and above the one they've had all year via the magic of withholding. They can and will penalise you for not making them this loan.

The 90% and 110% rule is a get out of trouble escape clause if you have paid the smaller of these two amounts to the government by the close of the tax filing year. The 90% applies to the current filing year tax liability and the 110% applies to the prior year's tax liability. So if you find yourself in this position you really need to know both to calculate any possible penalty and to know just how much of a loan you need to give the government.

As a general rule, if your business/income is growing, the 110% rule will be in your favour and as long as the IRS has payments that are at least 110% of the prior filing year's total tax liability they are happy. You'll also be happy because you'll have the use of your money
longer before handing it over.

If your business/income is shrinking, the 90% rule be in your favour. Keeping the IRS happy with payments that total at least 90% of the current filing year's total tax liability.

My story is, of course, not quite the estimated taxes and under withholding story that the 2210 addresses. Which is why I didn't even try to file a return in April. I just did 90% of the math and made a note that I needed to find my FET records to see if my actual payments exceeded the $30 credit to further reduce my tax liability.

Called the IRS got connected to a fairly sophisticated group and after a few minutes there was a notation in my file indicating the conversation/situation. Basic idea is that I prepare to file one form but don't file it unless there's an issue later.

FTB -- sigh. There doesn't seem to be a group that handles this sort of situation. Crazier still, if the folks on the phone are to be believed they don't have a way to match the piddling withholding paid to them by the insurance company to my file. How it is that somehow these lovely government employees think that getting a "corrected" 1099 is the solution. Gee wouldn't that be great if I could get 1099s showing what should have been with held rather than what was with held?

Finally decided that I wasn't going to get any useful info out of the FTB people, I decided that I'd file federal, and see if we have any post filing back and forth to clarify the situation before I even bother filing California.

The good news on the day is that the wonderful Libby and I had a marathon session clarifying quite a few of the outstanding questions about the upcoming San Diego Stitch n Pitch game -- 22 July day game.


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