Getting financial sinners to repent

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 audit

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 in the accounting firm Stout, Causey & Horning in Hunt Valley.

"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.

In the past few years, chances have been good that you would escape an audit. But this year, the IRS announced plans to audit 30,000 additional small businesses and self-employed people, signaling its intention to strongly encourage taxpayers to stay on the straight and narrow.

People who push the envelope back off after an auditor shoots down their "aggressive" deductions. "Afterwards, we see more careful documentation," says Horning. "Post-audit, considering tax implications becomes part of the strategy, not part of the mop-up."


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 the 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.

Big check to the IRS

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 .


An untaxed partnership distribution or self-employment income of $250,000 could result in an annual tax bill of as much as $100,000 for someone who doesn't have many deductions, says Bennett Berg, a financial planner and CPA with CBIZ Accounting and Tax Advisory Services of Chicago.

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.

No 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.

A rainy day fund is easier to build 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.

Joanne Cleaver is a business writer in Milwaukee.