TAX NEWS - JUNE 2010

Ask Tax Expert: Paying back taxes, managing college savings

How to clear up unpaid back taxes. How to report contributions to a college education fund. Those topics are tackled this week by IRS expert Jesse Weller, one of McClatchy Newspapers' "Ask the Experts" writers.

QUESTION: I have a Merrill Lynch account that the IRS took over because I was not paying my income tax. What is the best way to clear up this mess so I can move on? I am 78 years old.

ANSWER: It should not be too difficult to clear things up. Assuming you still owe a federal tax, contact the IRS to resolve the liability. We can work with you if you contact us; the worst thing you can do is stay silent.

If you have an IRS notice about your unpaid tax, call the phone number listed. If you do not have a notice, call 800-829-1040, weekdays from 7 a.m. to 10 p.m.

If you can pay the balance owed in full, we can provide a payoff amount, including penalties and interest.

If that is not possible, we will work with you to set up a monthly payment plan. In most cases, the IRS grants (though doesn't guarantee) an installment agreement with minimal paperwork when a taxpayer owes $25,000 or less and can pay within five years.

Depending on your financial situation, another option to consider is an Offer in Compromise, settling the tax liability for less than the full amount owed. It's a last re-sort when the liability can't be paid as a lump sum or by payment agreement.

More details are in IRS Publication 594 ("The IRS Collection Process") at www.IRS.gov. Or order a mailed copy by calling 800-TAX-FORM (829-3676).

Getting your tax situation corrected with Uncle Sam is the best thing you can do. There is no price tag on peace of mind.

Q: Last year, my wife opened a $2,000 Educational Savings Account (Coverdell) for our kid. We recently received an official copy of the ESA contribution information (Form 5498-ESA) for our records. It stated the information is being furnished to the IRS. Do we need to report this contribution to the IRS? Should we file an amendment since it was not covered on our 2009 tax return?

A: A Coverdell Education Savings Account (ESA) is a trust or custodial account created exclusively to pay for the qualified education expenses of a designated beneficiary.

You generally do not report contributions to an ESA on your income tax return, so you do not need to file an amended federal income tax return. Any individual can contribute to a Coverdell ESA if the individual's income for the year is less than $110,000, or $220,000 if married filing a joint return.

Although contributions to a Coverdell ESA are not tax-deductible, the amounts deposited grow tax-free until distributed. If distributions from an account are not more than the beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions.

The Form 5498-ESA reports contributions and rollover contributions made each year to an ESA. Keep the form with your ESA records. For more information about Coverdell ESAs, see Publication 970 (Tax Benefits for Education). You can download it at www.IRS.gov or order hard copies by mail at 800-TAX-FORM (800-829-3676).