need help estimating penalties/interest

[mblatour]

Have a guy who came to me with his '06 taxes. They were pretty straight-forward with income from W-2, some bank interest and unemployment income. All in all about $56.000. He's single, takes the standards and ends up with taxable income of $47,727. Tax due is $8489, and he only had $5926 taken out of his W-2. Result, a fed. balance due of $2653 (his state, MN balance due is $320).

He wants to file an extension because he can't come up with the money to pay right now. What would he be looking at all in all for penalties/interest on this situation?

Then it gets more complicated. He didn't file a 2003, 2004 or 2005 return. He had his '03 prepared professionally, he just never sent it in. He went through a nasty divorce and as he put it "neglected to take care of a few things". He says he was due a refund for that year. I told him he has only till this year's deadline to file for '03 or he'll lose that money. Is there anything he should watch out for, or expect from this situation?

What about year 2004 and 2005. He thinks he may receive a refund for one of those years because he still had the house interest which was a lot. But the other year he thinks he may owe.

Can you give me direction as to what penalties he can expect from all this? I let him know that there is a failure to file penalty, but is that true even if he is due a refund for one of those years? Then I told him about the failure to pay penalty. Is there also a late pay penalty? How does one go about estimating what those amounts would be?

He said he on the wagon now and wants to clear up his past problems and just get it all sorted out. He will get his '04 and '05 stuff together for me by next week sometime. I would like to give him some sort of a warning as to what will be coming his way.

Thanks for any help you can offer me!

[GIMoe]

Extension

He wants to file an extension because he can't come up with the money to pay right now. What would he be looking at all in all for penalties/interest on this situation?

An extension is only an extension to file, it is not an extension to pay. That amount is still due on April 17th and all penalties and interest will be added from that date. If the return is done and ready to file, he may be better off filing on time and getting on an installment agreement with the IRS. At least this way he shows an effort and is making payments rather than putting it off for a few more months.

[mblatour]

An extension is only an extension to file, it is not an extension to pay. That amount is still due on April 17th and all penalties and interest will be added from that date. If the return is done and ready to file, he may be better off filing on time and getting on an installment agreement with the IRS. At least this way he shows an effort and is making payments rather than putting it off for a few more months.

I realize that he doesn't get an extension to pay. I was trying to figure out what he's going to end up owing in addition to his tax for not paying on time.

I've never dealt with an installment agreement before. What's involved with that? I know we are running out of time quickly here. Thanks!

[jainen]

Get the 2003 and the 2006

Get the 2003 and the 2006 filed by Tuesday. I think there is still a non-filer program (ask practitioner services for a referral) that will protect him from adverse action being generated by the tax return itself. You will need a power of attorney so you can pull his transcripts to make sure everything is covered, but that can wait until next week.

Penalties are 25% late pay and 25% late file, plus about 7% per annum interest, but I wouldn't discuss that with him yet. You don't even know if there is a balance due, or if it involves substantial underpayment or fraud or anything real nasty. Just tell him you will figure it out as you make progress.

Ask him for at least $500 up front. If he refuses (even if he just says he can't afford it), thank him for asking but hand him all his papers back.

[mblatour]

Okay, I am in over my head!

Just by what Jainen wrote I am not sure I am ready to handle this type of situation. I have a small scale business I run from my home. When Jainen mentioned the non-filer program, I thought "what is that?" What would the "adverse action" be? Do you mean that because of him filing an '06 return, it would set a chain reaction of events rolling that affects the '03, '04 and '05 return outcomes?

I've never dealt with power of attorney situations either. Two years ago, my brother needed help with a tax problem for his '01 taxes. When I called to talk to the MN Dept. of Revenue, they asked that I hand the phone to my brother to give a verbal power of attorney and then they would be able to discuss his problem with me. Every time I called we had to do that. I wouldn't know what to do to for anything more than that.

When Jainen said "pull his transcripts", what do you mean exactly?

I know I am entirely unprepared for this. I was willing to give it a go and the guy really seems like a decent fella. I spent about an hour chatting with him (I was getting lunch ready for my kids and we had already gone over his '06 tax info.) I didn't have to do that, but I am often labeled as "chatty Cathy", so unfortunately it's in my nature.

When Jainen said to get $500 down payment on the bill, I went "holy moly". I've done only about a half dozen amended returns in the past and I charged anywhere from $30 to $150 (one person had done their own and had nearly every number mathmatically incorrect). I've never dealt with filing a prior year return simply because they didn't feel like it. I stick to Individual returns and sole proprietor businesses on a small scale for now. I do more schooling each year and would like to eventually go to school to become a CPA, but right now I am a Certified Tax Preparer/stay at home mom. I spend a lot of timing researching and learning, but I do not charge for that. So I guess what I am saying is that I didn't think I would charge $500 for preparing his '04-'06 returns. I already did the '06 (haven't sent it yet) and my bill was $95 for federal and state; it was only a few forms. I figured the other years would be more due to the fact they'd be long form, but not a ton more.

Again, I am in over my head, aren't I?

[GIMoe]

Form 9465

I've never dealt with an installment agreement before. What's involved with that? I know we are running out of time quickly here. Thanks!

Installment agreement is Form 9465. It is fairly straight forward. T/p tells the IRS how much he can pay by April 17th, how much he can pay monthly and what day of the month he can make the payment by. IF t/p allows IRS to pull money directly from Checking Account every month then there is a one time monthly fee of $52.00, if he insists on sending in a payment monthly then the one time fee is $105.00 -- these are added to his total along with monthly penalty and interest charges until total tax bill is paid. Make sure monthly payments are large enough to pay off within a 12 month period if at all possible.

This is all presuming that the return has been completed and ready to file.

[jainen]

Not at all

>>I am in over my head, aren't I?<<

Not at all. First things first -- your fee. $100 per year, right? I was thinking four years, but if you can use the one he already has, that's fine. $50 surcharge on each of the ones that are not current year. $50 for taking the P.O.A. $75 for the two or three 1/2 hour IRS contacts to stop collection action and get copies of his file. An extra $100 because he is a major prevaricator who will not give you a straight story in a timely manner. Or two hundred--he's already burned up an hour of your time that was supposed to be for your own children. I didn't mean get a down payment up front. I meant full payment. Yeah, I know, "the guy really seems like a decent fella."

The non-filer program assists taxpayers who come in BEFORE the IRS calls them. They get you prior year documents, forms, and instructions, and promise that the IRS won't bring criminal charges for failing to file. Helpful, but not essential.

Power of Attorney (Form 2848) makes it much easier to work with the IRS on behalf of the client. Since you aren't an enrolled agent you are probably not eligible to use it and the client will have to be present for all your contacts. Try Form 8821 instead.

Getting the IRS transcript of all his W-2's and 1099's is essential. You can't rely on the client's records--he is a non-filer, remember?

[mblatour]

Okay Jainen, you've got me interested in this

I would like to tackle this if I can. You have a point about not trusting the guy, Mr. Nonfiler. I shouldn't be so trusting. Points against me I suppose.

Unfortunately, I am turning to you to give me pointers which burns up your time away from your family! Why? Because I don't know where else to go. I have spent more time watching this board rather than participating; other than my own questions. Mainly because I don't have the experience to give out advice to others as I am a youngin'. Almost 30! I like to think I have a brain in this thing attached to my neck, and a little commen sense.

At this time, all I can offer is e-filing to my clients. I thought that going and getting fingerprinted at the police station and having a backround check done counts for something! But alas, I am not a CPA or enrolled agent.

When it comes to full payment up front, that's a new one for me. So far I've had no problem with customers paying me, but I often give them extra time. Sometimes they send me a check in the mail a week or two after I've filed their return and they have received their refunds. I prefer not to do it that way, but sometimes it happens.
I've been in direct sales for 5 years (self employed) and during that time, I've never had a customer NOT pay me. I always get paid, even if I have to hunt it down. Am I being ignorant? No, I realize that someday I may very well get stiffed.

Back to my questions. The non-filer program; I'll look into it. I'm not sure where to look, but I'll give it a shot. Secondly, I'll look into the Form 8821. About the transcript, how do I go about getting a copy of it once I have the permission?

[jainen]

don't call this week

>>About the transcript, how do I go about getting a copy of it once I have the permission?<<

Call the Practitioners Priority Service at (866) 860-4259 and spill your soul to them -- they will step you through everything! (Just don't call this week!)

[mblatour]

thanks

for the direction. I was looking at that number on my sheet of IRS numbers to call, but I have never ever called it before.

I'll take your advice and give an update later next week!

[Snaggletooth]

Don't Back Off

Jainen didn't mean to blow you away as he is often wont to do. We would like to see you complete this guy's mess. I think Jainen would too.

Charge-as-you-go. Don't give this guy the opportunity to wait until it's convenient. Charge after every appointment for what you have done, and when you're finished keep the work at your place of business until he completes payment.

LaTour, 2003 is the first priority. If he can find this return that he says was professionally-prepared, and there is a refund, all he has to do is mail it in. Watch out though -- why would anyone going through hard times turn down a refund by not mailing it in? You may find increasing skepticism with this guy's story as you go down the road with him. For sure, he will lose this refund if he doesn't mail it in, and his opportunity expires April 17th.

2006 is next. That's because 2004 and 2005 have already incurred maximum penalties. If he doesn't have enough money to pay IRS, at least get this return filed. Believe it or not, the IRS wrath falls much more heavily on non-filers than it does non-payers.

Do what you can, but don't get sucked in. I suppose there are such things as "penitent tax filers" but I've never seen one that was genuine. Many chronic non-filers are penitent to the extent they wish the problem would go away, but do very little to meet their filing responsibilities. Early in my career I had one that "genuinely" wanted to backfile his last three years. In reality, he wanted a business loan from the bank, and the bank required him to produce his last three years' tax returns.

[S T]

Mb

Hang in there, we are all in your corner, we know you can do it, and you have been given some very good advice. Seems like Jainen is really guiding you with various steps. Snags did a follow up.

Try to acomplish what is needed by 4/17 and then follow up from there. But by all means, do get a retainer in front and let this taxpayer know how valuable you are to him. I have been caught off guard several times and not asked for a retainer, and have "eaten" it in the end result.

Good Luck!

Sandy