Need to prepare 2006 tax return for new client

[AZ-Tax]

The IRS sent TP letter and the only deduction from income is the TP's "personal exemption" and TP's "standard deduction" per the IRS letter. Being past the 3 years I am assuming there can be no other deductions allowed, correct? If not then why go thru the expense of paying me to prepare the return and just sign the letter as accepting and pay the tax amount and be done, correct?

[ATSMAN]

I just did a 2008 return this summer because Taxpayer neglected to file that year and IRS audited him. He was directed to get a complete return prepared and filed for 2008. We used itemized deduction and we believe it was accepted because he paid the balance due, interest and FTP penalty. IRS waived his FTF penalty. He did file an extension but never completed his return that year due to family issues.

[Uncle Sam]

2006 Tax Return

This sounds strange.

The 3 year statute has expired - but IRS has 10 years to COLLECT on a liability from then.
Are you sure it's not a Substitute for Return that IRS calculated?
An SFR is NOT an official tax return. Your client needs to file a return based on factual information
as it should have been filed. The only thing that is forfeited is any tax refund due. But any deductions
that he/she is entitled to is still deductible in the calculation of the tax liability.

[Gary2]

When a return hasn't been filed, you're entitled to a correct calculation of the tax liability on the return. You can't claim those things that explicitly require a timely filed return, and when the SOL has run, you can't get any refund, but you don't lose the basic calculations - itemized deductions, adjustments, etc.

[AZ-Tax]

So can my client deduction depletion from Royalty income?

When a return hasn't been filed, you're entitled to a correct calculation of the tax liability on the return. You can't claim those things that explicitly require a timely filed return, and when the SOL has run, you can't get any refund, but you don't lose the basic calculations - itemized deductions, adjustments, etc.

My client has Royalties from box 2 of form 1099-misc. The statement included with the 1099-misc shows depletion. So is my client who still needs to file his 2006 tax return, entitled to deduct the depletion?

[ATSMAN]

You are Correct.