Credit Basics
Audits and other pathways to change
Sunday, July 11, 2004
Educators call them "teachable moments."
Parents call them "getting common sense."
Cops call them "scared straight."
There are plenty of terms for the moment of truth when you realize that things have
got to change right here, right now.
Accountants, financial advisers and credit counselors don't have a snappy label
for the moments when their clients sit up in shock, but they witness these revelations
all the time.
Sometimes it's a five-figure credit card bill. For others, it's the sickening realization
that they owe the IRS an awful lot of money.
Here are some of the situations that get people to repent and reform on the spot:
- IRS compliance audits. Anybody who has been the least bit sloppy in keeping her
financial records neat and tidy is never the same after enduring an IRS compliance
audit, reports Greg Horning, a partner with Hunt Valley, Md., accounting firm Stout,
Causey & Horning.
"It's easy to be brave when you are sitting alone in your office but when faced
with a revenue agent, you have to justify the dollars that are claimed on your return,"
he says.
People who push the envelope back off after their `aggressive' deductions get shot
down by an auditor. "Afterwards, we see more careful documentation," says Horning.
"Post-audit, considering tax implications becomes part of the strategy, not part
of the mop-up."
- Harassing collections calls. Brenda Grogan of Alexander City, Ala., spent much
of the 1990s afraid to answer the phone. Too often, a debt collector was on the
line berating her for her past-due bills.
Financially battered because of a divorce, Grogan tried to stave off creditors on
her own. But when her credit card debt hit $25,000--nearly as much as her annual
income--she gave up and called Consolidated Credit Counseling Services Inc.
The counselor helped her negotiate less onerous payments and also coached her on
curbing her spending so she could regain her financial equilibrium. Grogan's credit
history has healed enough that she was able to buy a new car recently, partly with
a loan.
- Writing a check to the IRS for $10,000 or more. People who are newly self-employed
or business partners sometimes forget that they probably are not having income and
Social Security taxes automatically deducted from their pay. Sometimes they live
high on the hog until it's time to calculate the tax bill, then turn pale when they
realize they owe tens of thousands of dollars to the IRS.
The unappealing solution: Pay back the IRS with interest over the next several years.
That is usually enough to motivate people to set aside tax money from every check
from then on.
- Facing an emergency with no financial cushion. Maybe the dishwasher conks out,
forcing a $500 replacement. Or a teen driver has a fender-bender that comes with
a $2,000 repair bill. Or the roof springs a $7,000 leak.
Routine household emergencies rarely come cheap. Prudent homeowners, of course,
have three to six months' income set aside in an easily accessed account to cover
precisely these sorts of things--not to mention unemployment.
Except that many people don't have an emergency reserve and end up charging the
whole mess on a credit card.
It can take months to pay off a balance for a no-fun home repair. That's usually
when people determine to stick with a monthly savings plan.
It's easier to build it up over a year or two than to try to squeeze out thousands
of dollars in just a few months, says Mary Flynn, a senior financial consultant
with Ernst & Young. Setting up an automatic payroll transfer to a savings account
will help.
Whatever your approach, get going on it right away. Flynn says that research indicates
that even the best-intentioned people don't follow through with a new financial
habit if they don't start it within 30 days of their moment of truth.
