Negotiating a Tax Settlement With the Government for Your Small-Business Debts

Q: In a recent column, you discussed how taxpayers could negotiate with federal and state income tax collection authorities to arrange repayment of back tax obligations. But what about sales taxes owed by small businesses? The Board of Equalization says I owe $3,800 from a business I sold in 1986. With penalties and interest, the total bill is more than $12,000. I am currently paying it off at the rate of $100 a month, but at this pace I will never be able to get rid of this. Will the “offer in compromise” you described for income taxes work here?

--M.M.

A: The Board of Equalization does have a process you can follow to clear your account. Although termed a “settlement” and not an “offer in compromise,” the end result is the same: a negotiated settlement of your debt.

You should write to the Board of Equalization, Settlement Section, 450 N St. MIC 87, Sacramento, CA 95814. Be sure to include your account number, the dates covered by the debts and your proposed settlement. A board representative will respond to your proposal.

Teacher Pension Reduces Spousal Social Security

Q: I always thought I would be able to collect half my husband’s Social Security upon turning age 65. But now I have just learned that any spousal benefit I get will be reduced by the amount of my state teacher’s retirement pension. Is this correct?

--S.V.

A: Public agency employees who did not contribute to Social Security are subject to what is known as the “government pension offset.” In the case of teachers, any spousal Social Security benefits you are otherwise eligible to receive will be reduced by up to two-thirds of the amount of your teacher’s pension.

How would that work? Let’s say your teacher’s retirement benefits are $1,000 and that your spouse or ex-spouse is receiving $975 a month from Social Security. As a spouse or ex-spouse at age 65, the most you are able to receive is half the wage earner’s benefits, or $487 a month. But as a retired public employee, that benefit is subject to a reduction of up to $666. As you can see, the reduction wipes out your spousal benefit. This offset applies to spousal benefits whether the applicant is married or divorced.

For more information, call the Social Security Administration at (800) 772-1213 and ask for the pamphlet titled “Government Pension Offset.”

Divorce-Settlement 401(k) Funds Exempt

Q: As part of a divorce settlement, I will soon receive about $20,000 from my husband’s 401(k) plan that will equalize our respective contributions to these plans. What can I do with this money?

A: Distributions from Keogh and 401(k) plans made pursuant to a properly worded “qualified domestic relations order” are exempt from the penalties--10% federal and 2.5% California--normally applied to premature (before age 59 1/2) withdrawals from tax-deferred savings plans.You are free to spend this money, after paying normal income tax on it, or to redeposit it into an individual retirement account to continue its tax-deferred status. The choice is yours.

By the way, these same rules do not apply to IRAs. When IRAs must be tapped to equalize the division of marital assets, the withdrawal must be made as a transfer from one spouse’s IRA to an IRA of the other spouse to avoid early-withdrawal penalties.

Carla Lazzareschi cannot answer inquiries individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 Or send e-mail to [email protected]