N. C. issues IOU's instead of tax refunds

[dyne]

TV news reported yesterday that North Carolina will issue IOU's instead of tax refund
checks apparently because they have run out of money. And this is weeks after returns
were filed for the first time allowing the new N. C. earned income credit. They must have
thought that they had plenty of money.
S. C. began allowing a computation a year ago which reduced the tax for most
self-employment taxpayers. Now they are running out of money. I suggest that both of
these new laws be repealed.

[DTS]

Dyne

CA did, as well. People can cash them between now and October. Our gov is sounding like a fiscal conservative, once again, and fighting tooth and nail like he did when he was first elected and you could still see his backbone.

We're almost $30B in the red and he wants to get rid of the "problem" in one move, not piecemeal (his words). You should be here to see both sides play this out and act like nothing is wrong! The fingerpointing is fun to watch.

D

[erchess]

North Carolina

I can't speak to conditions in our Sister State but I believe that until very recently there was a consensus in our legislature that taxes could be raised to the point that spending by the government could continue to grow exponentially without an unbalanced budget. They believed that at least in part because every discussion of a cut in the growth of any particular item in the budget is greeted with howls of protest. Only fairly recently has there been much public outcry against tax increases. I myself may be part of the problem because I have emailed my State Representative that funding for teachers and others who work with students and for anything used by either students or teachers needs to grow every year by two percent more than the rate of inflation and that if taxes must be raised to accommodate that so be it as long as the taxes raised fall most heavily on the wealthy. I even suggested reviving our Intangibles Tax as long as it hit only accounts over 2M in value or held by persons making over 200K in income. The problem of course with an overly progressive taxation system is that the largest contributors to the economy are also those most able to move to another jurisdiction.

I should note for those in other States that the reason NC abolished its Intangibles Tax was primarily a court ruling that the State had to tax all companies equally instead of discriminating based on the percentage of its income the company that had issued your Stock or Bond earned in North Carolina. As far as I know that court ruling stands to this day and I am inclined to think that it is a good ruling.

[OtisMozzetti]

Client says no more state tax refunds

A client has announced to me that he intends to make sure not to overpay his state income tax, because he doesn't want to ever see another tax refund in the form of an IOU.

I tell that client that he still would be wise to meet his withholding and estimated tax requirements, without paying so much as to cause a tax refund, because it still isn't worth paying the estimated tax penalty.

[JohnH]

I haven't seen anything in the news yet about NC issuing IOU's, and it isn't on the NCDOR web site. Not doubting you, dyne, but I am interested in confirming this if it's true.

So far, NC hasn't bothered with IOU's, they just came out and said "We ain't payin' until we've got the money." Funny, but when clients try that tactic with the state, NCDOR doesn't seem to be as understanding.

NC's own rules say they don't have to start paying interest unless they fail to issue a refund by May 30 for a return filed by Apr 15, so it seems that everybody should get 45 days interest-free to pay any amount they owe, just as a matter of fairness & honest business practice. But when you get to make the rules I guess you get to decide what's fair based on whose ox is being gored.

Anyhow, I'm advising anyone on extension to apply their refund to 2009 estimated taxes and then adjust their withholding (or decrease their estimated tax payments) as a way to be sure they actually receive the refund in a timely manner.

Also, I agree with Otis that it isn't wise to just skip paying estimated tax altogether when the amount is large. But I do tell people that it's good cash management to owe a little when they file. Evenif they miss the estimate and owe a small estimated tax penalty, that isn't a bad thing.

[Corduroy Frog]

Alabama is Notorious

Alabama has done this on numerous occasions. I have advised my Alabama customers to adjust their withholding such that they NEVER have a refund.

Many of my AL customers have estimated payments. If I have them to apply their refunds to the first quarters' estimated payments, they get an almost immediate benefit and don't have to wait on anything. I also encourage them to pay estimated payments of only 75%-80% of what would otherwise be calculated.

They have announced delays in refunds numerous times in the past. Even in the due course of business they are notoriously late on many occasions.

If all Alabama citizens did the same thing my customers do, the state of Alabama would NEVER NEVER again delay refunds.

[OtisMozzetti]

estimated tax penalty is to be avoided

I also encourage them to pay estimated payments of only 75%-80% of what would otherwise be calculated.

In some instances, the requirement in order to avoid estimated tax penalty is that 90% of the current year tax, or 100%/110% of the prior year tax, must be paid in equal installments unless annualization is used.

I would not encourage clients to pay so little that those clients incur estimated tax penalty.

[JohnH]

Well. let's run some numbers and see where things fall out. Assuming a 9% estimated tax penalty, the amount due will be about 5% of the underpayment due to averaging. So a $2,000 - $3,000 underpayment will cost the taxpayer about $100 - $150 in actual dollars if the return is filed and the balance due paid on Apr 15.

During the preceding year, if they were paying the estimate with money which could have been invested conservatively, then they're foregoing about 1-2% in earnings at current rates, so the true penalty is about $80 - $120. On the other hand, if paying the estimated tax decreases cash flow and creates a situation in which the taxpayer must borrow money at 9%, it's a wash. If they are paying an average of more than 9% on borrowed funds, then paying the penalty is less costly.

All of the above ignores the tax deductibility of interest (if applicable) and also does not take into account the cost of accounting fees to do the calculation. Obviously, if the estimated tax can be calculated down to the last dollar, then it's best to pay it and be done with it. But if there's any ambiguity about the amount which will actually be due, then I'll opt for owing a net $80 - $120 penalty as a matter of good business practice and smart cash management.

Thats my story and I'm stickin' to it. Depending upon the assumptions you make, your mileage may differ.

[Snaggletooth]

Otis M

I would not encourage clients to pay so little that those clients incur estimated tax penalty.

Otis, I don't think anyone would dispute that estimated tax penalties should be avoided. However, I can almost guarantee you don't have any Alabama clients. The estimated tax requirements are somewhat different (example, no 110%), and the enforcement is not the degree to which you are accustomed from the Federals. When things are tight, Alabama will create any excuse to avoid issuing refunds. And guess whose phone starts ringing??
Certainly not their state legislators.'

I also have had heart-to-heart discussions about clients paying either
a) 110% of their previous year liabilities
b) 100% of their previous year liabilities when that year contained an extraordinary income item.

Many of them can actually calculate losing far and beyond more interest income than the penalty would be, even allowing for the fact that the interest is taxable. It's not that the rate at the bank is that high, but the requirements for estimated taxes become unrealistic under the two situations mentioned above.

In these situations, the calculation of an estimated tax sufficiently high enough to avoid a penalty can be ridiculous. John H makes an effective argument as well.

[erchess]

Owing Money

My grandparents' generation and the ones before it blanched a bit at the idea of owing anyone money and I believe most people who even had credit cards or just accounts at stores paid them off in full every time money came in. But my grandparents' generation was the last in which anyone could possibly buy or build a home without at least fifteen years of mortgage payments and all of my life at the very least my parents lived two months of lost income from bankruptcy and I live that way. I think most others do too.

I tell my clients that it makes sense to be current with your taxes if you are not carrying any debt or if when you borrow money it always costs you less than 8% but that it does not make sense to pay your taxes as you go while carrying debt at rates of greater than 8% except to the extent necessary to be sure that you will pay off your tax debt including interest and penalty by July of the following year. Those who are not paid up by that time I do installment plans for and we rethink their withholding or estimated payments so that during the life of the agreement they stay at least current on their tax obligations.

When you pay a receivable on time you have met your responsibility. When you pay it late with the contractually required interest, penalty, etc you have also met your responsibility. It is not my fault that the government loans me and my clients money on better terms than most of us can get from anyone else.

[OtisMozzetti]

paying estimated penalty by design

I do hear what you gents and gals are saying.

If one mildly underpays, with a design to just pay estimated tax penalty if need be, then whatever uncertainty there may have been in all the forecasts works in the taxpayer's favor. The taxpayer pays the estimated tax penalty only on the difference between what had to be paid vs. what was actually paid. In other words, as seen by those short on cash flow, no payments are wasted.

[OtisMozzetti]

constructive receipt

By the way, if a state income tax refund was taxable income which sometimes they of course are, then the refund hasn't been constructively received until it was available in the form of cash, not just an IOU?

There is starting to be a secondary market in IOUs. Some banks will accept IOUs, which promise to pay interest at 3.5% per annum for the first three months. I wonder if the interest which they are promising to pay on the IOUs is tax exempt as a municipal (state and local government) bond.