Volume 14 Issue 1

Jan/Feb 2002

© by Tax & Business Professionals

Some of the most difficult cases for many professionals to handle are Non-Filers, individuals who have not filed state or federal tax returns, often for many years. While Tax and Business Professionals, Inc., does not directly handle Non-Filer cases, we will present the insights of a tax attorney who has handled numerous non-filing cases, some involving non-filing for up to 20 years.

Non-Filers are a diverse bunch, often including CPA's, politicians, military and police officers, to name but a few of the unlikely types who fail to file.

One 20-year Non-Filer was a commercial photographer who received 1099s each year from Fortune 500 firms. Prior to retaining an attorney he had never been contacted by the IRS. While the common perception is that the IRS computers will catch such non-filers, the opposite is often true. Anecdotal experience is that many Non-Filers escape detection, often for quite some time.

Retainers

At the first meeting, the Non-Filer signs a Retainer-Fee Agreement and an IRS Power of Attorney ("POA"), Form 2848, and agrees to pay and to replenish a retainer.

From thereon the Client is required to maintain a credit balance. Why? Non-Filers tend to be procrastinators, a trait which often contributes to their problems. In addition to being slow payers or non-payers, they are frequently risk-takers. If they are willing to take risks with the IRS, they are also likely to try to avoid paying tax professionals too.

Head Problems

Non-Filing cases are one clear instance where a tax professional needs to be concerned about the psychological problems of his or her clients. It is common for Non-Filers to attempt to talk their way out of every problem and consistently to blame others. "It was the fault of my prior spouse, former associate, former employer. . . ." The first task is to get the Non-Filer to shoulder responsibility for the past, both financially and mentally, in order to move forward.  

The retainer replenishment system helps enforce discipline. Most people will not pay money to resolve their tax issues unless they are serious about it. Often, Non-Filers are trying to get their acts together because they are about to remarry or are tired of hiding in fear. IRS wage garnishments and levies are also powerful motivators for getting into compliance. Non-Filers often have to be pushed into compliance mode and counseled about getting things done.

At the initial meeting, usually without the accountant present, the gravity of the situation is explained -- specifically, that non-filing can result in criminal penalties. If criminal penalties are imposed, usually the IRS later pursues the Civil Fraud Penalty as well, which is why tax criminal cases are called a "double headache."

A key objective of IRS Special Agents is to obtain criminal convictions and newspaper coverage. There will inevitably be a bulletin board outside the Agent’s office sporting assorted clippings of successful IRS criminal prosecutions. This is the in terrorem aspect of tax law enforcement.

Despite the Draconian effect of criminal penalties, the IRS Special Agents enforcing tax criminal laws are often rather selective, tending to pursue the most egregious cases. Probably to keep everyone on their toes, occasionally even "small potato" taxpayers are criminally prosecuted.  

More often than not, the IRS does not impose criminal penalties and is much less likely even to consider criminal or civil fraud prosecution if the taxpayer comes forward and begins compliance. This is one reason for the early filing of the POA.

Initial Memo

The basic facts should be obtained and an opening memorandum prepared outlining the Non‑Filer's reasons for failing to file. Often a divorce, business failure, job layoff, or illness is the initial culprit. The reasons become important later if there is an attempt to abate penalties or file an Offer in Compromise. The initial memo also serves to jog the Client's memory, chart a course of action, and, finally, familiarize the return preparer (usually not the Attorney) with the case.

In our next issue, we will consider the actions to be taken and matters that should be considered in the next phase of a Non-Filer case.

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Published jointly by The Tax & Business Professionals, Inc. and the law firm of Newland & Associates as a service to their clients.

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