Volume 14 Issue 3

May/June 2002

© by Tax & Business Professionals

In this issue, we conclude our series on Non-Filers, addressing the filing of late returns, penalties and wrapping up the case. For an expanded version of this series CLICK HERE. 

Don't expect the Non-Filer to have good records. It is common to hear that their records were destroyed by storage companies, fire, flood, etc. For some, the only records may be the IRS Master Files and Transcripts.

If no, or few, personal records are available, what can be done? Frequently, the professional has to reconstruct income and expenses for lost years. For example, if the Non-Filer installs carpet for a living, the number of square feet of carpet installed in an average day or week needs to be estimated.

Freedom to hold such conversations and make estimates should be protected from disclosure by the Attorney-Client Privilege. Confidentiality in this setting does not imply there is a sinister plot. Nothing in the tax law prohibits reasonable estimates of income and expenses.

While estimates are sometimes necessary, they should be reasonable and documented so the methodology could be explained in an audit. Proof of entertainment expenses should be contemporaneous to be sustainable but many business expenses can be estimated.

Many fear that all late filed returns will be audited. Not so. Anecdotal experience indicates that less than 5% are audited, even if many years of non-filing are involved.

Filing the Late Returns

Once the returns are prepared by the accountant hired by the attorney, they need to be filed. The practitioner should take the original returns to a nearby IRS Office in person and get IRS date-stamped copies. Why? Late filed returns are processed erratically by the IRS and sometimes proof of filing is important.

Posting & Civil Penalties

The IRS will eventually process the returns. Do not expect to receive one IRS document listing all of the years and tax due. Typically it takes a long time to receive bills for each year, and there is no logical progression regarding which years will be processed first. 

Estimating, reporting, and paying penalties and interest with late filed returns is not recommended because the IRS may not even impose anticipated penalties. There is little to gain from trying to guess what penalties the IRS may impose. 

If the late filing goes well (no audit), IRS bills will eventually be received, at which time any penalties become known. The late filing and late payment penalties will probably be imposed, along with (often) the substantial understatement penalty.

If returns for several years are filed late, some clients are inclined to pay the first bill received in the unfounded belief that prompt payment will improve the atmosphere for dealing with the IRS later. It doesn't; so it is better to negotiate a payment plan for all years at one time.

When the IRS comes knocking, a mode of payment needs to be adopted. Usually, the tax debt cannot be paid and an Installment Agreement needs to be negotiated or an Offer in Compromise needs to be considered. See An Offer You Can't Refuse (Mar/Apr '99 newsletter).

If the amount due is large enough, the case will be referred to a local Revenue Officer for collection. Smaller amounts will be collected by the Automated Collection Service (ACS) office in some distant city. If you are forced to deal with ACS, you may want to read Nailing Jell-O® to the Wall (Mar/Apr '00 newsletter).

If an Offer may be considered later, the taxpayers should guard against agreeing to an Installment Agreement for more than their cash flow justifies. Not only may they be unable to maintain such payments, but evidence of an ability to pay may thwart any chance for acceptance of the Offer.

Conclusion & Buzzards

For those against whom liens are filed, there are companies that misleadingly promise settlements for pennies on the dollar ("99 cents" is "pennies on the dollar" and is also 99% of the tax due). If you direct Non-Filers away from such companies you will have done the Non-Filers a favor, even if you choose not to represent them.

While the processing of Non-Filer cases is not glamorous, it can be profitable if handled correctly. If you need further guidance in this area, please call us at (800) 553-6613.

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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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