04 June 2011

Two Things I've Just Learned from the IRS

I got some bad financial news yesterday. Actually, it's not that terrible, but I do have to give about 75% of my tax refund back to the IRS because of some oversights they found in my return from 2 years ago (a return I've asked three times in six months for the transcript of yet haven't received).

(*) When I was fired from T-Mobile and went on unemployment, I cashed out my 401(k), something I'd been told was about the dumbest thing anyone can do. I understood this, but I didn't understand the extent to which this was a bad idea; I knew I would get less than if I'd waited, obviously, and that there would be deductions, but I didn't understand that I would be paying those deductions out of the final amount I'd receive. In short, I thought the deductions incurred when cashing out would effectively not be my problem. It turns out that when I was filling out the appropriate tax form for the 401(k) I was actually supposed to pay in 10% of the amount received, regardless of what the form's instructions said and calculations yielded. In other words, I thought the 10% for taxes was already taken out by the firm and paid for me as part of the transaction. After all, they spoke of the taxes in the same context as the deductions and final figure I'd receive, so I didn't have any reason to believe that more would be asked of me, especially when I filled out the tax forms (on which I even had help). Now that I think about it, here's a question: when I have taxes taken out of my paychecks, is the amount of the tax based on the gross or the adjusted gross after the money for the 401(k) is set aside? I think it's the latter, but I suddenly find myself unsure.

(*) Just prior to cashing out the 401(k) I'd gone through some debt consolidation. I had two cards through Chase bank, who had refused to let me merge the two accounts into one so I'd only have to pay one bill. So, I tried my best, but in my moving out to Missouri from New Mexico and adjusting to my new life with my then-girlfriend, I missed a payment. As a result of missing that one payment by a week, my minimum payment had now nearly doubled. It was more than my rent. Between that increase and the amount my other card's monthly payments came out to, it was practically double. I called Chase again to see if there was anything that could be done, to which they said no. I felt trapped and had no idea what to do, so my girlfriend suggested I call a credit counselor, something I'd been avoiding on a matter of pride. With said pride swallowed, I contacted a law firm, told them the situation, and they set to work talking the bank's amount down to something more reasonable that could be paid in smaller installments. Much of the balance by then were finance charges, so it turned out to be relatively easy to get those taken out. The problem is that the bank takes that difference between what you originally owed and what you agreed upon for a settlement, and reports it to the IRS as taxable income.

And there you have it, two financial matters I got schooled on in a single afternoon. It's a real torrent of emotions, but the only part of this whole issue that really has me mad is that this information comes from a tax form I've been repeatedly requesting for months. The only thing keeping me from sorting this all out sooner is that I have to wait for a document I'd already been waiting on and may well have to wait on further so I have all the information I need to make sure that I actually have to pay back the IRS. Hell, they even encourage me to wait on it as long as possible and give me multiple avenues for inquiring and contesting this adjustment. If they want a challenge, I'll happily give them one, regardless of who's in the right.
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