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September, 2010 Tax Tip

Nonfilers, This Tip is for You

This month’s Tax Tip is an invitation to nonfilers to re-enter the system by filing overdue returns and arranging payment options with the IRS.  The IRS and the state taxing authorities are becoming very aggressive in discovering and coming after nonfilers.  I have had many opportunities to help nonfilers get their tax returns filed, sleep well at night, and move forward with their lives.

If you or anyone you know failed to file tax returns when due, it's important to be aware that there are ways to resolve the problem and they are a lot easier than you may think. Many nonfilers may have missed filing for a year or more for one reason or another, and now are afraid to re-enter the tax system.  But, in fact, taxpayers who file overdue returns on their own are often treated reasonably well, and certainly much better than those who are caught.

For taxpayers who can't pay their entire tax bill at once, there are installment payment options.  The IRS will also consider an offer-in-compromise on any of the following grounds: (1) where a taxpayer is unable to pay the tax, (2) where there is doubt as to the taxpayer's liability for the tax, (3) where collection of the full amount would cause economic hardship for the taxpayer, or (4) where compelling public policy or equity considerations exist that provide a sufficient basis for compromise.

An offer to compromise hasn't been rejected until IRS issues a written notice to the taxpayer or his representative, advising of the rejection, the reasons for the rejection, and the taxpayer's right to an appeal of the rejection. The IRS can't notify a taxpayer or taxpayer's representative of the rejection of an offer to compromise until an independent administrative review of the proposed rejection is completed. The taxpayer may administratively appeal a rejection of an offer in compromise to the IRS Office of Appeals if, within the 30-day period commencing the day after the date on the letter of rejection, the taxpayer requests such an administrative review in the manner provided by the IRS.

IRS has an independent procedure to review its own proposed rejection of installment agreement requests.  This internal IRS review must occur before the IRS notifies the taxpayer of actual rejection of the installment agreement request.  The IRS also has a procedure to allow taxpayers to appeal—to the IRS Office of Appeals—the IRS's rejection of any request for an installment agreement.

Once a return is filed, the IRS has three years in which to audit it.  After that, the return is final.  However, if no return is filed, there's no statute of limitations.  IRS can come after the taxpayer at any time, even many years later.

I have represented some nonfilers who were actually entitled to refunds, some quite substantial.  A return claiming a refund can be filed at any time, but only the tax paid within the three years before the return was filed can be recovered.  Tax withheld during a calendar year is considered to have been paid on April 15th of the next year.  Estimated tax is considered paid on the return due date, which is generally also April 15th. Thus, a return filed more than three years late will likely be fruitless as a refund claim.



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