Late-Filed Return Question

[JohnH]

Taxpayer has been notified that his 2005 corp return is being audited. First audit appointment is scheduled for 3 weeks from now. For several months prior, I had been working with him to pull together his 2001 & 2002 corp returns, which had not been filed due to some extenuating circumstances. We are very near completion of the 2001 & 2002 work, but now comes the question in light of the just-received audit notice.

Should he go ahead & file the 2001 & 2002 returns prior to the audit, or is there any reason to wait? I'm certain the unfiled returns will come up in the audit, and no question they must be filed, but now there's the question of timing. (Although he doesn't want it to seem that the filing was prompted by the audit notice, there's probably no way to avoid that appearance at this stage).

But is there any strong reason to either 1) take action or to 2) hold off, in light of the fact that there's an imminent meeting with the auditor? Any thoughts, opinions, or experience in this area would be greatly appreciated.

[ChEAr$]

By all means

Taxpayer has been notified that his 2005 corp return is being audited. First audit appointment is scheduled for 3 weeks from now. For several months prior, I had been working with him to pull together his 2001 & 2002 corp returns, which had not been filed due to some extenuating circumstances. We are very near completion of the 2001 & 2002 work, but now comes the question in light of the just-received audit notice.

Should he go ahead & file the 2001 & 2002 returns prior to the audit, or is there any reason to wait? I'm certain the unfiled returns will come up in the audit, and no question they must be filed, but now there's the question of timing. (Although he doesn't want it to seem that the filing was prompted by the audit notice, there's probably no way to avoid that appearance at this stage).

But is there any strong reason to either 1) take action or to 2) hold off, in light of the fact that there's an imminent meeting with the auditor? Any thoughts, opinions, or experience in this area would be greatly appreciated.

get those returns filed right away, so that when/if auditor asks (who knows? he might
not ask even), you can assure him of full compliance (finally). I see no advantage in
waiting.

BTW, has client ever had any notices atall about non filing those returns? Or rather
should I ask, has client ever given you any such notices? (grin

[DaveO]

My gut would tell me to hold off.

He might not even ask about the unfiled years. Normally they look at the year before and the year after.

Had an audit last year where adjustments were made to 2005 and 2004. The auditor wanted 2006 real bad but it was on extension and I didn't file it until after the audit was concluded. Of course we got the audit notice for 2006 last month. Different auditor and he claims there was no connection with the previous audits. It's a very complex return that just screams "Audit Me".

[Black Bart]

I'm no expert, but

...
Should he go ahead & file the 2001 & 2002 returns prior to the audit...

is there any strong reason to either 1) take action or to 2) hold off, in light of the fact that there's an imminent meeting with the auditor? Any thoughts, opinions, or experience in this area would be greatly appreciated.

here's something from someone who claims to be. The following advice was taken from an interview by Tax Hotline (a monthly subscription tax newsletter) with a San Francisco tax attorney, one Frederick W. Daly, who wrote a book entitled "Stand Up to the IRS" which is about defending yourself at an audit (I've read it; it impressed me as good information -- not tax protestor junk).

"Never file a tax return while you are being audited for a previous year, or you'll invite the auditor to expand the audit to include the return you just filed. Postpone filing until after the audit is closed -- the audit results may help you file a smarter return in the future.

Get an...extension. If the audit isn't finished when your extension expires, simply do not file until the audit is over. The late penalty is based on the amount of tax you still owe when your return becomes due, so there's no penalty for filing late if you've already paid all the tax you owe through...estimated taxes."

Good luck.

[ChEAr$]

Get an extension?

here's something from someone who claims to be. The following advice was taken from an interview by Tax Hotline (a monthly subscription tax newsletter) with a San Francisco tax attorney, one Frederick W. Daly, who wrote a book entitled "Stand Up to the IRS" which is about defending yourself at an audit (I've read it; it impressed me as good information -- not tax protestor junk).

"Never file a tax return while you are being audited for a previous year, or you'll invite the auditor to expand the audit to include the return you just filed. Postpone filing until after the audit is closed -- the audit results may help you file a smarter return in the future.

Get an...extension. If the audit isn't finished when your extension expires, simply do not file until the audit is over. The late penalty is based on the amount of tax you still owe when your return becomes due, so there's no penalty for filing late if you've already paid all the tax you owe through...estimated taxes."

Good luck.

For a 2001 or 2002 tax return?

I will however agree with Dave that if the return was on a timely extension, I would hold
out until Oct 15th (1040 type of course). But for past due returns, the time is NOW.

[Black Bart]

Well, no.

While the extension advice applies to current returns rather than John's case, I thought his opinion in regard to letting an extension expire was right and of general board interest. While you don't agree with that, I do.

But the main thrust of the article (don't file while under audit) still seems valid to me. While audit chances of '01 and '02 may be remote, the possibility exists. Government agents take advantage of any opportunities you provide and, regardless of any noble motive, occasionally regard you as an "easy mark" if you overdo the "we're good/compliant/submissive taxpayers" stance.

[JohnH]

Good discussion.
Thanks to each of you for the helpful responses.

I've always believed that extending the current filing when a return is under audit is the prudent thing to do, but never really gave any thought to overpaying and then prolonging the filing even if it means a late-filed return. Will have to ponder that one.

In any event, I'm leaning heavily on the side of filing the past due returns before the audit. It's a little late to demonstrate good intent with any degree of certainty, but the situation is what it is, and if we were pressedI think we could demonstrate with some third-party information that the project was under way well before the audit notice showed up. At the end of the day, it can't hurt to be able to say all prior years' returns have been filed (irrespective of the timing), and depending upon whatever else comes up in the audit, it might be helpful to have that detail out of the way. We don't want the auditor to look at the case & get the idea early on that they are peeling an onion.

Bart - I'll get back to you on that "compliant, submissive, easy mark vs hard-nosed advocate" thing in a few weeks. I'm not losing sight of the fact that the situation is adversarial in nature, but there's something to be said for finding a middle ground when you know there are a couple of strikes against you at the outset.

[Lion]

Audit

Had a couple that hadn't been filing come to me when IRS letters piled up. When I talked to IRS, they seemed content to get most recent three years. But, they were not yet auditing this couple. We filed three years. Then couple wanted a payment plan. IRS asked for most recent six years before they would accept a payment plan.

I'd be reluctant to file prior years right now. If requested by auditor, I'd tell her they were in progress when activity had to switch to gathering audit information; get right on it; file by such and such date; blah, blah, blah...

[outwest]

With regard to old returns...

let us not forget the statute on assessments will never run until the return is filed.

Had a client that got roped into a payroll scam in 2001. (criminal conviction for promoter, etc)

They had baled out pretty quickly, filed their own 941 in for 1st quarter 2002 forward. There were problems in the first six weeks of that period. When the IRS went from the promoter's records to examine the client, the statute closed 2002 based on those filed returns.

However, 2001 had no filings that we could find, the statute did not run and they got zinged for over $5000 on 2001.