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Deliquent Tax Returns


Preparation of Delinquent Tax Returns – It is a crime to not file a tax return if taxes are owed.  However, there is no criminal penalty if you file your return but can’t pay your taxes.  It’s better to file delinquent tax returns before the IRS contacts you.  Even if you are several years delinquent and don’t have the money to pay the tax due, it is best to get those returns filed as soon as possible.  If you owe taxes, there will be penalties and interest.  But if you file these returns before the IRS contacts you, it will be far less likely the IRS will pursue criminal sanctions against you.  


We can help you get your delinquent tax returns filed correctly and efficiently and work with you to resolve the problem of IRS back taxes.


How the IRS contacts the taxpayer for unfiled returns


If the IRS discovers that a taxpayer has not filed tax returns for one or more years, it may proceed in several different ways. The most common way is for the IRS to request the returns in a letter to the taxpayer.  An IRS agent may also visit or call the taxpayer and give a deadline to have the returns filed with the agent.  


The absolute worst way to be contacted about unfiled returns is to be visited by an agent with the IRS Criminal Investigation Division.  This means that the nonfiling is the subject of a criminal investigation.  If contacted by someone from the IRS Criminal Investigation Division about your tax returns (whether filed or unfiled), contact a tax attorney right away.


Substitute For Return


If a taxpayer does not file a tax return, the IRS can legally prepare a return for the taxpayer based upon the information available to the Service.  This is referred to as a “Substitute For Return”.  Hopefully it won’t come as a shock to discover that the IRS generally makes incredibly unfavorable assumptions when it prepares a return for a taxpayer.  If the IRS prepares a Substitute For Return (“SFR”), it will mail a copy to the taxpayer’s last known address and ask the taxpayer to sign the return and mail it back to the IRS.  It may not be in a taxpayer’s best interest to sign this return even if the amounts are accurate.  (Never sign a SFR if you believe the document is inaccurate!)  It may be to the taxpayer’s advantage to prepare their own return and send it back to the IRS agent with a copy of the SFR letter you received requesting that your return be accepted in lieu of the SFR.  Obviously, the taxpayer should make sure that the return they prepare is complete and accurate regardless of what the SFR reflected.  


One advantage to the taxpayer in filing their own return rather than the IRS preparing an unsigned SFR is that an unsigned SFR does not start the statute of limitations for your return being audited or for the IRS to collect the taxes due.  In addition, the taxes reflected on an unsigned SFR are generally not dischargeable in bankruptcy.  In other words, with an unsigned SFR, the IRS can audit that return forever and attempt to collect the amount owed forever with no way of discharging the debt in bankruptcy.  The moral of the story, file your return and avoid having a Substitute For Return prepared for you.


I haven’t filed my return because I know I have a refund.


It is important to note that if you have a refund due and you don’t file your income tax return within certain time limits, you may lose the amount of the refund to which you were otherwise entitled.  For example, if your employer withheld federal income taxes from your wages during 2009 which more than covered your 2009 income tax liability, generally, if you do not file your 2009 individual income tax return on or before April 15, 2013 (three years from the original due date of your 2009 return) you lose the ability to claim this refund.


We can help you file delinquent tax returns and get back into compliance.  Getting information from several years back to complete these returns may be difficult.  We can assist you in obtaining information reported to the IRS on Form W-2’s and 1099’s as well as tax related information from other sources.


How Many Years of Unfiled Returns Should Be Filed?


Generally, the government can only bring criminal charges against a nonfiler within six years of the date the tax return was due.  However, there is no statute of limitations for the IRS to pursue civil claims against nonfilers.  In addition, fines and penalties on unfiled return continue forever.


However, it is generally IRS policy to not pursue nonfilers after six years from the filing due date.  IRS Policy Statement P-5-133 provides:


Taxpayers failing to file tax returns due will be requested to prepare and file such returns except in instances where there is an indication that the taxpayer’s failure to file the required return or returns was willful or there is any other indication of fraud.  All delinquent returns submitted by a taxpayer, whether upon his/her own initiative or at the request of a Service representative, will be accepted. However, if indications of willfulness or fraud exist, the special procedures for handling such returns must be followed.


Where it is determined that required returns have not been filed, the extent to which compliance for prior years will be enforced will be determined by reference to factors ensuring compliance and evenhanded administration of staffing and other Service resources.


Factors to be taken into account include: but are not limited to: prior history of noncompliance, existence of income from illegal sources, effect upon voluntary compliance, anticipated revenue, and collectability, in relation to the time and effort required to determine tax due.  Consideration will also be given any special circumstances existing in the case of a particular taxpayer, class of taxpayer, or industry, or which may be peculiar to the class of tax involved.


Normally, application of the above criteria will result in enforcement of delinquency procedures for not more than six (6) years.  Enforcement beyond such period will not be undertaken without prior managerial approval.  Also, if delinquency procedures are not to be enforced for the full six year period of delinquency, prior management approval must be secured.


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