Non-Filer Strategy

[RayT]

Taxpayer has not filed since 2003. Taxes due approx. $38k. Two questions:

1) I've calculated Late File Penalty 100%; Late Pay Penalty 25%; and, interest 5% per annum average. Is this close enough for estimates; or, are there more accourate percentages I should be using for planning purposes?

2) Should taxpayer file all 8 years, through 2011, at same time; or, file in smaller groups of 2 or 3 years at a time? Looking for "best" strategy.

Will most likely end in Offer in Compromise. Any coments will be greatly appreciated.

[DaveO]

I've never attempted to calculate the penalties. Often the IRS comes in below my estimates but I always warn the client that the IRS penalties will likely be equal to or more than the tax.

I always have them file all returns at once. It may well take the IRS 6 months to post all returns and staggered filing will only delay the assessment of tax and the date at which the OIC can be started.

Do you have w-2's for all years? I get a POA and pull transcripts from eservices to be sure I have all reported income and see if any SFR's are out there.

If multiple states are involved some extra time to insure the residency issues are correct in every year will pay dividends although the look back for most states only seems to be about 6 years at the most.

[JohnH]

I think you may be a little high on your estimate of the penalties.

I'd estimate the Failure to File penalty at 25% of the original tax due, the Failure to Pay penalty at 6% per year, and the interest at the rate applicable for each year - probably an average of about 7-8% per year. Even this will probably yield a figure that's a little high, because there's some interplay between FTF and FTP penalties at the 25% mark, but close enough for government work.

[Roberts]

I agree, I'd let the IRS determine the interest and penalties, notify client of your rough estimate so they aren't shocked.

I wouldn't go back more than 6 years. The IRS is highly unlikely to go back any further and it requires a manager at the IRS to request more than the 6 years. If they haven't come after him yet, I'd stick with the 6. It's also recommended in the book "Stand Up to the IRS" by tax attorney Frederick Daily. If they ask for more than 6 years, tell the IRS the client doesn't have the documentation to complete a return - they'll stop there almost every time. If they persist and do the return for the client, you can say you've "found" the documents.

My personal preference is to submit them all at the same time / separate envelopes.

Have you done an offer in compromise? I've been studying it and hope to begin offering the service in 3-4 months.

[RitaB]

Not seeing it

I am always a little surprised when we advise non-filers to only file the years that will "get looked at". I mean, we wouldn't tell an independent contractor not to include income on the current year return just because there is no paper trail and IRS won't know about it, right?

And, please, don't anybody take these comments personally. I am just confused as to why we seem to be ok with folks not paying "old" taxes. But, we get pretty riled up at clients who are dodging current taxes.

It's almost like new sinners get justice, but old sinners get grace.

We're in VBS this week. I am exhausted. Just so you know.

[DaveO]

One of the requirements of submitting an OIC is having all required returns filed, this also apples to installment agreements. In one of the first non-filer cases I handled I started by filing the current year and the 3 or 4 preceding years under the theory they wouldn’t look back that far. After they nailed his very large refunds due in the last three years I discovered that the IRS had SFR’s back for 10 years. In order to flip all those I had to file all the back returns, even did a few by hand. In the end he got a huge refund, not from the old returns but from all the current refunds they took.

[kpangelinan]

I am always a little surprised when we advise non-filers to only file the years that will "get looked at". I mean, we wouldn't tell an independent contractor not to include income on the current year return just because there is no paper trail and IRS won't know about it, right?

And, please, don't anybody take these comments personally. I am just confused as to why we seem to be ok with folks not paying "old" taxes. But, we get pretty riled up at clients who are dodging current taxes.

It's almost like new sinners get justice, but old sinners get grace.

We're in VBS this week. I am exhausted. Just so you know.

This is where I stand as well. I've done thousands of multiple year non-filers and believe it or not, the good majority of them have all of their documentation going back 10 and 15 years and I file every year. I've also done the 6 year deal only when needing to halt collection activity, but in my own experience, if the 6 years produce substantial liabilities, meaning they had self employment income or claimed exempt of M9 on their W2's the IRS has requested years prior to the 6.

It's like licorice and many accountants are split on the issue, but the one's (accountants) I've surrounded myself with are in the camp of filing every year. I believe (it's been a while since I researched this) even though the IRS requests just 6 years, the tax payer is still legally obligated to file and pay if he knows he earned and did not pay in.

I don't see any strategy in sending in the returns at different times. Send them in all at once, in separate envelopes as already suggested.

And I second all the suggestions on trying to figure out the penalties and interest....give them a rough idea so they're not shocked. If you try to give them close to accurate figures (so you say), you'll get egg on your face.

[New York Enrolled Agent]

I am always a little surprised when we advise non-filers to only file the years that will "get looked at". .

While it is the obligation of every taxpayer to file a return as required by §6012, practitioners generally follow the contents of the Internal Revenue Manual and policy statement 5-133

1.2.14.1.18 (08-04-2006)
Policy Statement 5-133
Delinquent returns—enforcement of filing requirements