What if You Have Avoided Filing Taxes for Years?

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There are many people in the United States who have neglected to take care of past due tax returns—even for more than a few years. Perhaps times were tough and they thought they would catch up on the taxes once their economic situation improved yet now there are potentially years of past due returns piling up and the chore seems simply overwhelming. Some research points to the fact that as many as a quarter of all Americans don’t file their tax returns at all or file fraudulent tax returns.

The Crime of Failure to Pay Taxes

Technically, failure to file a tax return and send in money you owe is a misdemeanor for which you could incur charges up to $25,000 for every tax year you are delinquent and could even be imprisoned for up to a year. Before you panic, you should know that the IRS really has no interest in sending people to jail—they simply want their money. Additionally, it is unlikely the IRS will prosecute someone who voluntarily contacts the IRS in order to take care of their back taxes. Generally the only people who actually end up in prison for neglecting to pay their taxes are highly public figures that the IRS wants to make an example of or cases which exhibit willful and blatant fraud. So, the IRS will likely not imprison you but they will almost certainly assess fines as well as interest for the taxes you neglected to pay in past years.

Penalties Assessed by the IRS

If there is any positive information involved here, it could be that the IRS is not allowed to charge penalties more than 25% of taxes due for any given year. Interest, on the other hand can continue to stack up. It is worth the effort to attempt to convince the IRS to decrease your penalties although you have to come up with a plausible explanation as to why you did not file your taxes. Keeping in mind that there is little the IRS will consider a reasonable excuse, you might be able to use any of these circumstances: a family member who suddenly died, a divorce, a diagnosis of a mental illness, rehab treatment for alcohol or drug abuse, extended military service or terrible advice from your accountant.

Substitute for Return Form

Most people have never heard of a Substitute for Return form, but the IRS sometimes uses them to file returns for those people who neglect to file their own. The IRS will compute what they think you might owe therefore when you actually get around to filing your own tax returns you will need to adjust these tax returns in order to take advantage of specific deductions you might have qualified for during each specific year.

How to Fix Your Tax Tangle

The first stage in fixing your situation must be to call the IRS; before they will talk to you it will be necessary for you to provide personal information which allows the IRS to identify you. The IRS will likely ask for a definite timeline in which you agree to file all your past due tax returns. Should you find yourself unable to meet this deadline, call and request an extension. It can be a very good idea during this time to consult a tax attorney who can best determine how you should proceed in order to pay the least amount of penalties and not risk any type of criminal prosecution. Once you have your tax situation in hand, never let a year go by without filing your tax returns!

Rev. Rul. 2012-18 Affecting Restaurant Employees, Waiters and Bartenders

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In Rev. Rule. 2012-18, affecting restaurant employees, waiters and bartenders, the IRS has updated guidance on what will be considered tips, to which FICA rules do not apply, and service charges, which are wages subject to the FICA rules, requiring the applicable employee wage withholdings.  In summary, the IRS will look beyond how the payment is characterized by the employer.  The IRS states that mandatory additions to a bill are part of the service charge, and not a tip, even if designated as a tip in the bill. In such instances, the IRS will require the tip to be characterized as a service charge.  This ruling is anticipated to be applied retroactively by the IRS.

See http://www.irs.gov/irb/2012-26_IRB/ar07.html & Rev. Rul. 2012-18
In the First Circuit Court of Appeals, in an appeal of a Tax Court decision, a married couple, with real property held in Trust for their adult sons, was denied an offer in compromise.  Because the couple was seen as having a nominee interest in the real property, the IRS properly included the value of the real property in their net realizable value of the couple’s OIC filing, and as a result, the couple did not qualify for the OIC.

See Case No. 11-2217, United States Court of Appeals

For the First Circuit

Missing Receipts Which Prove Deductions

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Perhaps you find yourself in the unenviable position of being audited by the IRS and many of the deductions you claimed are being challenged. If you are unable to claim your legitimate deductions through lack of receipts or documentation you may find that you owe substantially more in taxes and may even owe penalties and interest. Even though you may have lost receipts you are allowed to use an affidavit in order to prove the deductions—even though the IRS may not tell you this. While the IRS wants people to think they are not allowed to claim a deduction without the paper to back it up, in most cases this is just wrong. In some cases taxpayers may even have a canceled check but are still told it is simply not good enough.

It is critical that taxpayers know that oral testimony—your word of honor—can be legally sufficient to prove a deduction. You will be required to back up your word with a written statement, signed under penalty of perjury, that the deductions you took were correct and accurate. Such an affidavit—so long as it is plausible and uncontested must be accepted by the IRS thus allowing you to claim your original deductions. Now that you know you can survive an audit even if you are missing receipts, here are some additional tips for getting through the trauma of an IRS audit.

Tips for Sailing Through an Audit

Even if your tax return was all on the up and up, you may still be targeted for an audit. The primary way to sail through an audit with flying colors is to above all, be prepared. In other words, simply assume you will be audited every time you file a tax return. Keep receipts religiously and make notes of your deductions throughout the year rather than trying to remember it all on April 14th. If you receive a notice for audit respond as quickly as you can. You generally have thirty days in which to respond, but doing it more quickly can help you turn the auditor into an ally.

The audit notice should tell you which items on your tax return are being looked at, so prepare copies of all necessary documentation to bring to your first meeting. Never, ever give the auditor originals as you may never see them again. Don’t bring more than you have been asked to bring, however, or you could be opening the door for further questions. Answer the questions you are asked and produce the documents requested—beyond that exercise your right to remain silent as much as possible. This is not because you have anything to hide, rather simply to keep this time consuming task down to a minimum. If you have received a CP2000 letter this is the very simplest type of audit, sometimes known as a mail-order audit because no in-person meeting is necessary and you are only required to send in requested documentation.

The Auditor is Not Your Friend

Any time you are notified of an audit remember that while you should always be polite and friendly to the auditor, they are not your friend. At the end of the day their job is to ferret out tax fraud and they may have already identified you as a potential tax cheat. Remember, however that you do have rights and they may not be violated even by the IRS. The IRS is not allowed to intimidate you and if you have a deduction that is legitimate and rightfully yours, don’t let the auditor disallow it simply through lack of a receipt. In some cases it can be a good idea to consult a tax attorney prior to your audit to discuss any concerns you might have regarding deductions or what you should expect and what you should say to the auditor.

 

Voluntary Disclosure of Foreign Held Assets

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In ongoing efforts to identify US taxpayers hiding assets overseas and raise additional tax revenue, the IRS announced changes to its Voluntary Disclosure Program and the Closing of an Offshore Loophole.  Under previous iterations of the Voluntary Disclosure program, the IRS states that it has collected in excess of 4.4 billion in additional taxes, bringing a significant number of taxpayers back into the US tax system.  The current program, announced in January of 2012, has penalty provisions ranging from 5% to 27.5 percent, depending on individual taxpayer circumstances.

IR-2012-5, Jan. 9, 2012 – http://www.irs.gov/newsroom/article/0,,id=252162,00.html

IR-2012-64, June 26, 2012 – http://www.irs.gov/newsroom/article/0,,id=258430,00.html