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Money Talk with Liz Weston for January 28, 2010

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Liz Weston discusses fessing up on taxes, what to expect when you're turned down for credit and rebuilding your scores.

Dear Liz: I am freaking out and losing sleep. I got a letter about five years ago from the IRS telling me I owed it money, so I stopped filing my taxes. Now I feel scared and nervous and don't know how to fix this. I have my paperwork and want to file all my returns and see how much I owe. I usually get refunds so hopefully the tax bill won't be too bad, but I just don't know where to start. Should I hire an attorney or just throw myself on the mercy of the IRS? Money is tighter than ever, but I feel that I can't move forward until I resolve this issue.

Answer: It's too late for you, but others who may be tempted to ignore their obligation to file tax returns need to know two things.

The first is that the failure-to-file penalty is much worse than the failure-to-pay penalty. Since the IRS offers payment plans, it's better to file than not, even if you can't pay right away.

The second is that you have only three years to file a tax return before you lose any refunds to which you might have been entitled.

In short, not filing can cost you, big time. You don't need to throw yourself on the IRS' mercy, but you should find a good tax preparer who has dealt with this issue before. Many have, as there seems to be no shortage of people like you. Your local certified public accountant society or the National Assn. of Enrolled Agents, at http://www.naea.org, can provide referrals.

Dear Liz: We are fortunate to be debt free with a nice cash reserve. We typically pay our bills in cash, by check or by a credit card that's connected to our brokerage account. Imagine our surprise when we applied for credit at two retail stores to get a discount on items we wanted and were turned down on the spot at both places. We have asked for, and received, the government-required reports from the three major credit bureaus, and the information provided seems correct, to the best of our interpretation. Short of a significant effort to get more credit, which we can survive without, what do you recommend we do?

Answer: Under the Equal Credit Opportunity Act, you have a right to know why you were turned down for credit. Simply referring you to the credit bureaus isn't sufficient -- the retailers should have given you the reasons your applications were refused. If you haven't received letters by now explaining their rationale, write each retailer's credit-granting department and point out that they're required by law to give you an explanation.

It could be that your scores weren't high enough. Even though your finances are in good shape, the fact that you have only one active credit account might be damping your scores. If that's the case, simply adding another credit card could boost your scores and make you eligible for instant credit offers.

Or it could be your scores are fine and the problem is your income, or what the retailers think your income might be. Credit card lenders are under regulatory pressure to consider borrowers' incomes, and some are using various services that purport to estimate incomes based on other information in your credit reports, such as the size of your mortgage or your credit limits. If you have no mortgage and only one card with a low limit or no limit reported, that estimate could be way off.

But you don't have to guess. The retailers should tell you. If they don't, you can report them to the Federal Trade Commission.

Dear Liz: I am trying to rebuild my credit and am following many of the tips I've read in your articles. I recently obtained a secured credit card and an auto loan just to help with rebuilding my credit. Can I increase my credit score even if I pay off the entire credit card balance due each month before any finance and interest charges are incurred? And can I increase my credit scores over time even though I currently have a tax lien and judgment on my credit report?

Answer: Let's tackle your last question first. You can mitigate the effect of serious negative marks such as tax liens, judgments, bankruptcies, foreclosures or repossessions by being responsible with your other credit accounts, but these missteps will still drag down your score as long as they're on your credit reports. Most negative marks will drop off after seven years, although bankruptcies can be reported for up to 10 years and there's no limit to how long unpaid tax liens can remain on your report -- which should be a good incentive to pay those off.

Being responsible with your credit accounts means paying them on time and using only a fraction of your available credit card limit. (Using less than 30% is good, and using less than 10% is even better.) It does not mean you have to carry a balance. Credit reports and credit scores typically don't distinguish between balances that are carried month to month and those that are paid off, so you might as well save the finance charges and pay your bill in full each month.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at http://www.asklizweston.com. Distributed by No More Red Inc.

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