The Huffington Post Author covering the development sounds worried. I mean really, most people who owe the IRS are broke and private dead collectors abuse broke people, right?
Now…I don’t necessarily disagree that most people who owe the IRS are living paycheck to paycheck, and I don’t disagree that private debt collectors have a reputation for being meanies and using meanie words.
But the Author may want to consider a few things about the IRS:
First, thanks largely to a progressive tax system that punishes hard work and ingenuity and that the IRS enforces, the American economy has no edge. Poverty is growing.
Second, debt collectors are meanies sometimes, but the idea that the IRS collection system is any less “abusive” than private debt collection is absurd. IRS collection is abusive by definition and it’s abusive in reality every single day.
Making the second point is easy.
The IRS needs nothing more than 30 days of time after the issuance of a final notice letter to seize most of a paycheck. No lawsuit needs to be filed, and the burden of proof is on the taxpayer to get out of a jam.
I spoke earlier this week, to a young mother of 4 whose husband earns $45,000.00 per year. His paycheck is being levied and much of the check is taken. He has tried to stop the levy by speaking with IRS collection, but the IRS won’t stop it until he provides a financial statement disclosing all of the families private financial information, and two missing tax returns that re-disclose private financial information.
Of course, the Husband isn’t aware of the short term hardship provisions that exist, but the IRS collection department didn’t explain that option to him, and has forced him to seek help, while trying to keep his job and feed his family.
I can’t count how many clients have complained to me about the attitude an IRS Officer used during a discussion. If the Author doesn’t think IRS collection personnel don’t “dress down” taxpayers, he needs to ask around a bit. Throwing some private debt collection into the mix will be nothing new. The Huffington Post Author shouldn’t kid himself.
If you have unfiled tax returns and the IRS is looking for them as they always do, you should know a few things:
1. The IRS has income and other information about you. You can get the info from them.
The IRS maintains a record of w-2 forms, 1099s, mortgage interest and other items that are legally required to be reported by employers and others on your behalf. If you haven’t filed in quite a while, you will probably need to ask the IRS for your “income history” for each year that is un-filed to help you in recreating your income and deduction numbers. You shouldn’t just rely on the IRS’ documents alone to re-create your history however.
2. The IRS typically requires the last six years’ returns be filed to be considered “compliant”….but,
IRS Policy Statement 5-133 and the Internal Revenue Manual at 22.214.171.124, tell the IRS to consider you to be “in the system” for purposes of working with you if the last 6 years have been filed. However, that doesn’t mean that the IRS will only ask for the last 6 years of returns. It may ask for returns that are older than 6 years. You need to talk to an experienced tax resolution attorney before deciding which returns should be completed and which should be filed.
3. Sometimes it makes sense to leave the IRS’ Substitute Tax Return in place and not do your own tax return.
If you don’t file a tax return for a while, the IRS will do it for you. It will do it wrong because it will only treat you as single and take no itemized deductions. This often results in really large debts as well. BUT…the IRS only has 10 years to collect a tax debt and even though it doesn’t have to respect this 10-year rule if you didn’t file the return, it usually will. So, if several years have passed since the IRS did the incorrect return and if your correct return will still leave a substantial debt, it may not be wise to file it in an effort to replace the IRS’ Substitute Return. Again, talk to an experienced tax resolution attorney about this.
4. Before filing the returns it is wise to determine how you are going to deal with the debt.
There are several options for most people. You may be able to settle it for a fraction in an IRS Offer in Compromise, pay a small amount or nothing in an IRS payment plan or non-collectible status, or you may be able to use the Payment Plan or Non-Collectible Status help you to get to bankruptcy and possibly wipe out most or all of the debt. If you cannot pay the debt in full in a reasonable amount of time, then bending over backward to get the returns just right especially if there are complicated expenses and deductions that must be estimated may be a waste of time. In fact, in some circumstances the higher the debt the better…again talk to an experienced attorney about why I say that.
5. In certain circumstances, the returns need to be filed very quickly
There are several common situations that mean you should get the returns done and with the advice of legal counsel get the returns filed….asap.
The IRS is getting ready to file a Substitute Tax Return
If the IRS is getting ready to file a Substitute Return and you know two things, one, that the debt will be high whether they file it or you do, and two, you may be a bankruptcy candidate down the road…you need to beat the IRS to the punch. Walking it into the local IRS office and getting a copy stamped isn’t a bad idea. The reason, if they beat you to it, the principal debt may not ever be dischargeable in bankruptcy.
The IRS is garnishing your wage or levying your bank account
Missing tax returns will create a situation in which the IRS can simply ignore your request to resolve the collection activity.
3 years are about to pass since the date the return was due to be filed and you expect a refund
If you file the return 3 years and 1 minute late, the refund you were owed is legally confiscated by the IRS and isn’t applied to your other debt.
6. Having someone with an experienced set of eyes review your tax return history is usually a wise investment
It’s important to have someone who deals with the IRS all the time, review the situation.
I have written about unfiled tax returns quite a bit. The reason? Many Americans don’t file tax returns on time and a good percentage of those people have failed to file returns for several years or more.
If you haven’t filed in quite a while and have questions, this article will provide answers to most of them and help you to avoid searching our blog for each answer individually.
What is the Statute of Limitations on Unfiled Tax Returns?
If a tax return hasn’t been filed, there is no formal statute of limitations period. In theory the IRS can continue to ask you for a return indefinitely. But it doesn’t for two reasons:
a. The IRS will usually do a tax return for you at some point, using the income information it has gather from your employer and other sources.
b. If you haven’t done the return for several years and the IRS hasn’t done it for you…it may not be requested as a pre-requisite to dealing with your tax problem. In other words, the IRS may only demand 7 years of returns to consider you to be “in compliance” or back in the system and it may simply ignore the older years.
If I haven’t filed a tax return for several years, do I need to file all of the missing returns?
If you haven’t filed for a long time, the IRS will typically tell you how many years you need to file in order to be considered “compliant” or back in the system. That time period shouldn’t be more than 7 years.
If the un-filed return is older than 7 years and the IRS hasn’t done a substitute return, you may not need to file it.
If the IRS has done an old return for you, you may want to do your return if the correct return will reduce the debt substantially and if it makes sense to do so in relation to the IRS statute of limitations on collection.
What if I can’t pay the tax I owe on a missing tax return or several missing returns…should I file them?
Although rarely prosecuted as a crime by itself…failing to file a tax return is a crime and owing a tax debt isn’t.
If you are trying to settle a debt with the IRS or arrange a payment plan, it will demand certain missing returns are filed before it allows you to proceed.
I am going to file for Bankruptcy; do I need to file tax returns?
Certain returns have to be filed in order to obtain a discharge in your bankruptcy case generally. Income tax returns should be filed as one element or requirement to discharging your obligation in bankruptcy on the debt. Your bankruptcy Attorney should be able to help you determine which returns need to filed for purposes of the bankruptcy case. An Attorney experienced in both tax and bankruptcy should be able to tell you which returns need to be filed in order to obtain a discharge of the tax debt obligation in the future.
If I have unfiled tax returns do I lose my passport?
It is possible. You won’t be denied for owing tax debt though but the Government State Department does review and discuss with the IRS to see if your returns are missing.
Do I have to file to claim a Refund?
Yes. The IRS isn’t going to issue a refund to you unless the return is filed.
Is there a time limit on filing a return that will cause me to lose my refund?
If you are due a refund, you only have a short period of time to claim it. There are two different rules at play.
1. Two Year Rule
If you paid the IRS money or the IRS took money from you for a debt related to a substitute return, and you file the return within two years and you don’t owe or owe less than the IRS received, you should get the money back. If you wait for more than 2 years, the IRS keeps it, unless the Three Year Rule applies.
2. The Three-Year Rule
If you haven’t filed a tax return and it has been 3 years since it was due, you will lose your refund. You will lose it no matter how large the refund was.
So you have until the later of three years form the date of the original deadline to file the return or two years from the date the tax was paid to claim a refund of overpaid tax from the IRS.
Your 2012 tax return was due with an extension on October 15, 2013. You will have until October 15, 2016 to file a return and get your tax refund. If you file your return one-day after that three-year period expires, the refund is lost.
If you filed a return, you can claim any additional refunds by amending within three years from the original return due date.
What if I don’t have all of my information to create the missing return(s)?
You can retrieve and/or recreate information necessary to complete a return. The old 1099 and w-2 information can be retrieved from the IRS. Old property tax bills can be retrieved from the City you live in. Profit and Loss statements can be created using old bank statements. Mileage logs can be recreated using a calendar that you may have had for the year.
The law only requires you to file a return that is based on the “best of your knowledge” standard. The return doesn’t have to be 100% accurate.
Is the IRS going to penalize me for failing to file a tax return on time?
The penalty is larger than the failure to pay penalty. It is wise for that reason if you know you will owe to file the return on time.
Will my failure to file tax returns make the debt non-dischargeable in Bankruptcy?
One of the basic requirements to treat income tax debt as dischargeable in bankruptcy is that you file the tax return more than two years before you file the bankruptcy. If the IRS files a substitute return for you first, the principal portion of the tax debt may never be dischargeable in bankruptcy.
Whenever we see a client who has several years of missing tax returns and we know that the debt related to those returns will be large, we suggest that the returns be filed quickly in order to beat the IRS to the punch and to preserve the ability to treat the debt as fully dischargeable in bankruptcy later on.
If you have unfiled tax returns, I’m not going to Judge you. I have helped hundreds of Arizona clients deal with unfiled return issues and have learned that at least in Arizona, the failure to file a return is usually the result of emotions and thoughts we all have at some point in our lives.
THE MOST COMMON GROUP OF REASONS FOR NON-FILING
You may have been afraid to file a return that has debt associated with it. Especially if finances are low and there are children or other priorities at the time.
2. The snowball effect
The first return is filed late and “lo and behold” no one showed up at the door. So when the next year’s return due date rolls up…you put that filing off as well.
3. Lost Records
Now a few years have gone by…and the IRS sends a letter asking where the returns are. A little panic sets in as records are searched and you find that many are missing.
OTHER PROBLEMS THE FAILURE TO FILE CAUSES
Now…I don’t like to lecture anyone about why they should have filed either and don’t do it in person with clients. This is because everyone already knows that the disclosure of personal income and budget information is legally required and failure to do it can be considered a serious crime. There are other reasons that you need to be aware of if you aren’t already about filing the return(s):
1. Substitute Tax Returns
The IRS will usually do a return if the original isn’t filed. It won’t take deductions and the debt will often be much higher than if the Tax Return was filed correctly. The Substitute Tax Return assessment causes other problems as well. It starts the IRS collection machine rolling which includes the filing of Liens and the issuance of Levies, but it may also cause the principal debt to be non-dischargeable in bankruptcy even if the correct return is done later.
If marriage is a goal and unfiled tax returns exist, the potential marriage Partner, may have some serious second thoughts as a result.
3. Financial Issues
Filed returns are a pre-requisite to getting a home loan or filing for bankruptcy. If the IRS has done a Substitute Return and debt exists as a result, the IRS will have likely filed a Tax Lien which will complicate your financial life as well.
SO DO I NEED TO FILE EVERY MISSING YEAR?
Having said all that, the real question again is… do you need to file each year if there are lots of unfiled years?
The short answer is usually no. If the returns aren’t filed at all, either by the IRS or by you, the IRS is usually only looking for the last 6 years to be on file. If the IRS has done years for you that are older than this, it may make sense to replace those returns with correct returns.
We tend to go through a specific process with each client in order to determine which years need to be done and that same process helps to deal with the debt.
1. Analyze IRS History
We gently attempt to determine your filing record and obtain Income History documents from the IRS. This is usually done by contact with the “Batline” or the Tax Practitioner Hotline which is supposed to be neutral. This initial foray into your records tells us a lot:
a. What years are missing
b. What years the IRS appears to be interested in
c. What years the IRS has done Substitute Returns on
d. Statute of Limitations period(s)on collections
e. Bankruptcy Discharge Dates
f. A history of your dealings with the IRS
g. A record of all the income, mortgage interest etc. that was reported
h. The status of IRS Collection activity
i. The status of Lien Filings
When we know these things it is much easier to determine which years need to be done. Sometimes, very few returns need to be done and that will depend on a number of factors.
2. Analyze Personal Finances and Goals
Sometimes the decision as to which returns need to be done depends on your personal finances. If you are a candidate for an Offer in Compromise and the IRS has done several substitute tax returns…it may not make sense to correct them. A thorough review of your financial situation, past, present and future, will tell us whether an Offer in Compromise is feasible, or whether a bankruptcy makes more sense or whether a payment plan in conjunction with the IRS Statute Period on collection or a later Bankruptcy makes the most sense. Which returns are done, often depends on what legal option makes the most sense as well.
3. Creation of Returns
Once we know the above, we can make a final decision about the returns and get them created. We can often do this even if you don’t have perfect records.
4. Dealing with the Debt
The work that took place to analyze the IRS history and your financial situation is now used to create documents and arguments that will help reduce or eliminate the debt. Again, the Offer in Compromise may be the best option but there are others that may make more sense in the end.
If you have multiple years of unfiled tax returns and don’t know what to do…do something. I advise that you call me or another attorney who has alot of experience with these issues and get your IRS History and your financial situation reviewed. Only when you do this, can you really know which returns need to be done and start the process of dealing with it.
If you haven’t filed a 2012 return yet and you didn’t ask for an extension to file, you need to file it as soon as possible. The IRS gets to add interest and penalty to your debt for each month un-filed and for each month unpaid and it adds up fast.
The penalty for filing a late tax return is about 5% of the amount of unpaid tax you owe for each month or part of the month that the return is late. The amount is capped at 25% of the amount owed. For example, if the debt is $15,000, the first penalty for the month is about $750.00.
There is also the failure to pay penalty that equals one-half of one percent of the amount of unpaid tax. This penalty is capped as well at 25% of the tax due.
Many of my clients are shocked when they file several years of late tax returns and find that for many of the years, the debt is almost double the net tax. Interest is accruing on the net tax and interest is accruing on the penalties which will total 50% of the net tax at some point.
Filing an extension to file doesn’t solve the requirement to pay the tax. The extension only allows more time to file the return, not to pay it, and if you file it after the extension date, the late filing penalty kicks in anyway. There is no extension to pay the tax.
Many people we meet haven’t filed for several years. The first step we take is to determine which years to file and to get those years filed. Once we know the amount including the penalty and interest, we are able to determine the best legal option and than we can negotiate with the IRS or take some other legal avenue. Depending on the situation, we may be able to arrange a reasonable payment plan, get penalties eliminated, negotiate a formal settlement via the IRS Offer in Compromise or even use bankruptcy to deal with the debt at some point.
The most common option we see is when we are able to challenge the incorrect Substitute Return the IRS has created with a correct return and substantially reduce the debt. Just this week we finalized some returns that will change the tax debt for a client from about $150,000.00 to about $50,000.00, a savings of $100,000.00
We are here to help with your tax problems whether you are late in filing, late in paying, the IRS is sending threatening letters or you are being audited. We help our clients make and implement plans that result in freedom from IRS problems.
File Tax Return Late? Debt Barred From Bankruptcy Discharge?
I repeat myself on an almost daily basis when I tell people that income tax debt and certain other tax related debt is dischargeable (the obligation to pay it can be eliminated) in bankruptcy if certain requirements are met. The requirements in their most basic form are:
a. The tax return that forms the basis for the debt must have been due for filing more than 3 years before the bankruptcy is filed.
b. The tax debt can’t have been assessed (determined to be a debt formally) within 240 days of the bankruptcy filing date.
c. The taxpayer cannot have committed fraud or “willful” evasion in relation to the debt.
d. The taxpayer must have filed the tax return more than 2 years before the bankruptcy case is filed.
There are two issues I often confront in relation to the above rules.
The first issue is what my client has done to stop the clock from running on the above time frames. Prior bankruptcy filings, prior offers in compromise and certain types of appeals may serve to extend some or all of the dates and make the bankruptcy filing more difficult.
The second issue has to do with the 4th item above, and that is whether the taxpayer filed the tax return at least two years prior to the bankruptcy filing and whether the taxpayer filed the tax return before the IRS or state taxing agency assessed a debt based on a return it created.
A new issue is slowly spreading across the US in relation to the 2-year rule however.
Specifically, some courts are using a decision out of the US Court of Appeals for the Fifth Circuit, McCoy v. Mississippi State Tax C.pdf, 666 F.3d 924 (5th Cir, 2012) to interpret the bankruptcy code in a way that will be very detrimental to delinquent tax return filers.
Several Courts have now interpreted a provision in the bankruptcy code to mean that if a tax return was filed late, by even one day…the 2-year rule doesn’t matter, and the debt can never be discharged.
The reasoning these courts are using has missed a step and the IRS’ own litigation position on the issue CC 2010 016 (1).pdf differs from these opinions. Nonetheless, this line of reasoning is spreading.
Right now the IRS is not challenging the discharge of debt related to late-filed income tax returns in Arizona bankruptcy cases. However, there is no Arizona case that speaks to this issue directly and the Ninth Circuit Court of Appeals hasn’t faced the issue either.
It is possible as a result, that a late-filed return may never be considered dischargeable in a bankruptcy case at some point in the future.
My advice to those who think they may have a large tax debt remains the same. Have the return created, take it to an experienced tax resolution attorney and consider filing it before the IRS creates a return for you.
An obvious addendum to the advice – file your returns on time.
A federal court in Nevada has barred the owner of several Instant Tax Service Franchises from preparing tax returns. Benyam Tewolde and his wife signed an injunction order without admitting guilt which was signed by the US District Court Judge Miranda M. Du.
Apparantly Mr. Benyam and his staff were helping clients fabricate business and income information, falsely claiming filing status, and education credits, selling bogus loan products, and filing returns without customer consent. They also allegedly filed fraudulent personal returns on their own income.
The injunction bars Mr. Tewolde and his wife from preparing or filing federal tax returns for other people, training tax preparers or owning/managing a tax preparation business…forever.
The Feds are also after the Franchisor Instant Tax Service and it’s owner, Fesum Ogbazion in Dayton, Ohio.
The Justice Department’s Tax Division has obtained hundreds of injunctions in the last decade against tax preparers that defraud taxpayers and those who file fraudulent returns.
Information about these types of cases is available on the Justice Department’s website .
If you are going to hire someone to help you create a current year tax return, we always advise that you use a reputable CPA, especially if you are in business or have rental properties. You can contact us and request our CPA referral list.
IRS Debt: The stuff of sleepless nights and serious regrets.
If you have a serious tax debt ,you may have some regrets and worse…you may feel as if there won’t be a viable solution.
I can tell you though that for many people with serious tax debt problems, there is hope. Many of my clients can attest that if you are willing to create a plan, and combine it with some patience and hard work, you can substantially reduce or even eliminate the debt.
The following legal methods are the most common ways we do it.
1. IRS Statute of Limitations
The time period the IRS has to collect is limited to ten years by 26 U.S.C Section 6502. The 10 year date is important, and we often use a payment plan or non collectible status to get to it.
Here is an example:
My client had a tax debt that had grown to $100,000.00 over the course of 7 years. He had been in and out of payment plans with the IRS. His tax debt had reached an age that it was dischargeable in bankruptcy but he didn’t want to file a bankruptcy. He would have “qualified” for an offer in compromise with the IRS as well.
However, he was going to retire and his income was going to drop in half. That reduction in income allowed him to negotiate a new and very small payment plan with the IRS of $50.00 per month. As his new income was not going to increase and his overall situation was going to stay substantially the same, he decided to finalize the payment plan negotiation and wait for 3 years.
At the end of the 3-year waiting period, he had paid approximately, $1700.00 toward the $100,000.00 debt, the remainder was wiped away and the IRS lien was released.
The above scenario is common, and much more common than you would think. In many cases it is wiser to “lay low” and let the clock run, than to take a more of a risk in terms of cost and file an IRS offer in compromise or a bankruptcy that will stop the statute of limitations clock from ticking away.
2. Challenge the Amount of the Tax Debt
The IRS assesses incorrect tax debts all the time. These incorrect assessments are typically the result of an IRS audit during which the taxpayer wasn’t able to prove the case or the creation of an incorrect return by the IRS because the original return was never filed.
Here are some options:
Appeal the Audit Result
IRS Audits can be appealed and they can be appealed all the way to the US Tax Court if the rules are followed. If you know that the IRS got it wrong, appealing the case may be the best option.
Appealing the IRS Substitute Tax Return
If the IRS files a return for you, it is usually incorrect, and often results in a debt that is larger than it should be. The IRS uses this incorrect debt to engage in collection activity.
These incorrect returns can be appealed as well. Most people don’t file the appeal on time, and in those cases a process called an “Audit Reconsideration” is used. The IRS will usually accept a correct return during the Audit Reconsideration process, and replace the incorrect return reducing or even eliminating the debt in some cases.
Trust Fund Recovery Assessment – It can be challenged
If you are signing checks, or making decisions about which bills should be paid for a business you can be held personally responsible for the trust fund portion of any employment tax the business should be withholding. If the IRS issues this assessment, you must consider appealing the decision or you will have a debt that is not dischargeable in bankruptcy and that is typically very large.
Innocent Spouse Relief – If you didn’t know you shouldn’t have to pay
Sometimes the spouse will hide some things from you like the fact that he or she didn’t disclose all of the income earned at the business on your joint return. There is often egal redress for the innocent spouse in these types of cases.
3. IRS Offer in Compromise
The US Tax Code at 26 U.S.C Section 7122 lays out the law regarding the IRS Offer in Compromise. The IRS Offer in Compromise is just the Government’s program for those it believes have little ability to pay all if the tax debt over a period of time. The amount the IRS uses to determine whether the debt can be paid or not, is called the “IRS reasonable collection potential”.
In the past, most IRS Offers in Compromise failed and they did primarily because the formula used to determine the reasonable collection potential was weighted in the IRS’ favor.
In May of 2012, the IRS changed the rules. We think that these rule changes will increase the number of successful Offers in Compromise. Anyone with serious tax debt should have an experience tax resolution attorney analyze whether an offer will make sense.
Many aren’t aware that bankruptcy can be a powerful option in dealing with IRS debt. Certain tax debts can be reduced or even eliminated in bankruptcy. bankruptcy.
The most important thing to understand about tax debt and bankruptcy is that the bankruptcy code trumps the IRS. If an offer in compromise doesn’t make sense, the taxpayer will often end up making unreasonable payments to the IRS on the debt over a long period of time. A bankruptcy must be considered in those instances.
An installment agreement is often used prior to the filing of a bankruptcy primarily in order to ensure that the date requirements for discharge of the tax debt are met. The Bankruptcy Code requires that the tax is based on a return that was due at least 3 years prior to the bankruptcy filing and that the return was filed by the taxpayer at least 2 years prior.
We have used bankruptcy to help our clients eliminate or substantially reduce millions of dollars in tax debt. For many, it will be the best option in the end.
5. Penalty Abatement
There are upwards of 140 IRS penalties and each one of them has an exception based on “good faith”.
The most common penalties we see are the failure to file and the failure to pay penalties. These can be removed even though you filed the return late and paid the balance late, if you acted in good faith and there was some reasonable basis for the failure.
Removal of these penalties can help in cases where the taxpayer will end up paying most of the debt in an IRS payment plan.
If the debt will be reduced in an IRS offer in compromise, or in a bankruptcy, the amount of the penalty is usually irrelevant and no request for penalty abatement is necessary.
Sharing income with the Government is a burden and a responsibility we share. Many of us think that it is the worst way to raise revenue, but it is the law and failure to do so can result in serious problems. Despite this, there are millions of people in the U.S. who are late filers. If you are a late filer you are worried and want to do something about it.
Here are several things to consider as you prepare the returns.
1. You are going to lose some refunds
The IRS is allowed to keep the refund you were supposed to receive if you don’t file the return in question within three years of its due date.
2. Lost Earned Income Credit
That same 3-year rule applies to the Earned Income credit. Don’t file the return within 3 years of due date? Lose it as well.
3. Your debt will be larger than it should have been
The IRS gets to tack on a penalty for filing the return late and a penalty for paying late. Interest is added to the debt and the penalty amounts. Old return filings cause the debt to be doubled in many cases.
4. IRS Substitute Return
The law requires that people who pay you tell the IRS about it. The IRS can use this documentation to create a return for you. It then uses the return to collect even though it is usually over-stated and incorrect. In our office, this is a big problem, as many of our clients could have removed tens of thousands of dollars of tax debt via bankruptcy if they had filed the return before the IRS filed the substitute return.
5. IRS Prosecution
The willful failure to file a tax return is a misdemeanor and can result in a sentence of up to one year in prison for each tax year not filed. The IRS does prosecute the cases.
6. Avoiding IRS Prosecution
Most people with unfiled returns aren’t charged with a crime for a few reasons:
a. It is difficult for the IRS to get to everyone. There are lots of non-filers and not enough employees in relation. This is changing thanks to upgraded computer systems.
b. If you come forward before an IRS investigation or examination ensues, you should avoid prosecution. This is current IRS policy.
c. The IRS can’t prosecute the failure to file a tax return if the return was supposed to be filed more than 6 years ago.
7. The substitute return can be “replaced”
The substitute return mentioned above can be replaced via the audit reconsideration process. The IRS will typically accept your correct return and replace its incorrect substitute return with it. There are situations in which you will want to leave the return the IRS has done in place. Get some help with this.
8. IRS files first? Bankruptcy probably won’t wipe away all of the debt
In most Jurisdictions, an IRS substitute tax return ruins your ability to treat the debt as dischargeable in bankruptcy. I constantly tell people with unfiled returns who think they may owe large sums when the returns are filed to file them right now. You must beat the IRS to the punch because bankruptcy may be your best option and you will ruin your chances to use it by filing after the IRS does.
9. The Tax Return doesn’t have to be perfect.
Many people don’t get the returns done because they feel like they don’t have all the proof they need to create a correct return. A perfect return isn’t required though. You can recreate the numbers using a reasonable basis and make a best estimate. The “Cohan Rule” has helped thousands who don’t have good records.
“The Devil is in the detail”. At least that is the way I think the old idiom goes. This is especially true when dealing with the IRS. The mega sized IRS administration is so loaded down with Rules and Regulations it is a wonder it can stay afloat.
This makes it especially fun for taxpayers who are trying to prove they did something in the past that will help their case now.
A common problem that I see is the taxpayer who “knows” that he or she filed a tax return for a particular year and the IRS is claiming that it was never filed. The problems associated with this are numerous. Just a few of the common problems are listed here.
1. The taxpayer often has to do the return over again because they didn’t keep a copy.
2. The statute of limitations on collection of the debt never started because the return was never “filed”.
3. The time frames necessary to meet bankruptcy requirements never start to run.
4. The IRS has often filed it’s own return for the taxpayer and overstated the debt.
5. That IRS filed return is now being used to bludgeon the taxpayer with liens and levies.
6. That same IRS filed return has probably made it difficult if not impossible to discharge the tax debt even if corrected in bankruptcy.
If you are filing an IRS tax return and you are doing it on time or late, it makes sense as a result to make sure that you can prove the return was filed in the first place. A small but as you can see, very important detail.
So the question is how to do that?
File the Return Electronically
When you file the return on time, you can file it electronically if your taxpayer is set up to do this or if you use one of the online tax prep services. The IRS even has it’s own service that allows certain taxpayers to file for free and electronically.
There are problems with e-filing, most of which have to do with getting the information correct on the return so that the system will accept it. For most though, e filing works well.
It also allows you to easily prove that you filed on time because the return is usually marked with an “electronic postmark”, a time-stamp that attaches to the return.
Mailing it – US Postal Service
Many people just mail it in with a stamp. In my opinion if it is mailed to the right location, it almost always gets there. If filing it on time isn’t that big of a deal, i.e. you are expecting a refund than if the IRS doesn’t get it, you will eventually figure that out and re-send.
What if you are filing a return that will tell the IRS how much you owe? You want to ensure they receive it on time if possible and even if late filed, you want the “clocks’ mentioned above to start running.
If you mail it – you could simply follow up to make sure you get a bill from the IRS within a few months. If one doesn’t arrive, there is probably something wrong and you will need to send them in again.
Walking returns into the office
The IRS has local offices that will accept returns that are walked in. The nice thing about it other than waiting in line, is that they will take a copy and stamp another that shows not only when you filed, but what you filed as the stamp is on the front page of the return.
Many of our clients with late returns will walk the return in and get a stamped copy.
This is the best way to ensure the IRS gets the return and for purposes of proving that you filed it later.
Sending returns via certified mail
Really…what is the point of going to all the trouble? The certified mail receipt doesn’t prove what was in the envelope does it?
Some people will put the certified mail receipt number on the first few pages of the return and the signature page and of course on both receipts and then copy the entire package of documents and the envelope in which it was sent.
Overkill? Usually yes. Some of us will be glad we did though.
We lead busy lives. Filing an income tax return doesn’t really fit into our schedule. However, If a large debt is anticipated…it should be a priority.
Otherwise, that tiny detail, the inability to prove a return was filed, could become a “devil”.