Millions of people across the United States do not file tax returns under the mistaken belief that it is best not to file a tax return if they cannot pay the tax. However, past due or unfiled tax returns cause a host of problems. It is both illegal not to file and a strategic mistake.
In our current digital, interconnected world, it is very difficult to hide from the IRS. Assume that the IRS will eventually find you. And the longer you wait, the greater the interest and penalties you will owe in the end. And in some situations, non-filer cases can become criminal if the IRS can prove willful disregard of the law.
What Happens if a Tax Return is Past Due
If a tax return is not filed by the taxpayer, the IRS may prepare a Substitute for Return based on available information, like W-2’s or 1099’s, The Substitute for Return is prepared without the exemptions, deductions and beneficial filing status that normally benefit the taxpayer. This usually results in a significantly higher tax bill and offers a bad result for the taxpayer.
The IRS will not prepare a Substitute for Return if it has no financial documentation, such as if the taxpayer owns a business. In that case, a Revenue Officer will attempt to contact the taxpayer to obtain the missing returns. This is often done through the mail. Alternatively, a Revenue Officer may make an unannounced visit to the taxpayer’s home or place of business to request the returns. This can be upsetting or embarrassing.
If the taxpayer remains uncooperative and does not submit the required tax returns, the IRS will issue a summons. The summons requires the taxpayer to appear at the offices of the IRS with their financial documents, bank statements and receipts, at which time the missing tax returns will be prepared. Generally, a required appearance at the IRS can be avoided by calling the Revenue Officer and promising to submit the returns within an agreed-upon amount of time.
If the summons is ignored and the taxpayer does not appear, another summons will go out. If that is also ignored, the case will go to the Department of Justice where a government attorney will file a motion to compel the taxpayer to appear in Federal Court with their financial records.
What is Needed to File a Past Due Return
To avoid all of this, past due returns should be filed as soon as possible to minimize interest and penalties, which continue to accrue. Financial books and records for each year need to be assembled, including W-2’s, 1099’s and proof of deductions, such as mortgage interest, real estate taxes paid and charitable deductions. If income documents are missing, your CPA or accountant can usually get wage and earning reports from the IRS under a Power of Attorney.
If the taxpayer owns a business, then accounting records for each year will need to be assembled based primarily on bank statements, credit card statements and reports from third parties, like PayPal. The tax returns of a business cannot be prepared without accounting and bookkeeping. This will usually require assistance of a CPA, accountant or bookkeeper.
If financial records for a business are missing or unavailable, or if the business transactions were primarily in cash, accounting reconstruction based methods acceptable to the IRS may be required.
While past due returns are being prepared, it is wise to tell the IRS that the returns are in process and will be filed soon. This shows cooperation and will usually put a hold on enforcement activities.
But I Still Cannot Pay…
Once the past due tax returns have been filed, it is now time to pay the federal and state taxes due, plus interest and penalties. If the taxpayer owns a business, there may also be sales taxes and payroll taxes to pay.
Alternatively, the taxpayer can negotiate a resolution of the amount due. Options to resolve the debt to the IRS and the state include an offer in compromise, an installment agreement or a temporary hold on collections based on inability to pay. Penalty abatements are also available in certain circumstances. Negotiation of a tax resolution is best handled by a CPA or accountant with experience in the processes and rules of IRS representation.
Best of all, once the past due returns are filed and the taxes paid, or a negotiation of a payment option is in place, harassment from the IRS will stop. That means no more nasty letters, liens, levies and garnishments. You will be back in the good graces of the government. You can go to sleep at night without worrying about taxes. And you can get on with whatever is important to you in your life or in your business.
If you or someone you know has an issue with the IRS, please contact us at (678) 235-5460 or (773) 828-0551.
Or you can reach us by email at Gary.Massey@masseyandcompanyCPA.com.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, sales tax, and small business accounting and bookkeeping.