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Forgot to file?

Forgot to file?

What is…I forgot?

As we say good bye to another tax year, we find ourselves planning for yet another tax season (unless that call from Fiji was just too good to resist). While we are doing year-end planning with our compliant clients, we can’t help but take that call from Forgetful Frank, who hasn’t yet  filed his 2018 returns. In addition, he forgot to file 2017, 2016 and 2015…well there goes watching Jeopardy!

So with this in mind, I thought it would be fun to hear some of the more unusual reasons for non-filing, and of course, some legitimate remedies for our friend Frank.

Here’s some that will remind you of Klinger telling Colonel Blake on M*A*S*H that half the family is pregnant, while the other half of the family is dying. (Google it—trust me.) These excuses are available out on the Internet from various sites…

  • “My tax return was on my yacht, which caught fire.”
  • “My wife helps me with my tax return, but she had a headache for 10 days.”
  • “I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant.”
  • “My child scribbled all over the tax return, so I wasn’t able to send it back.”
  • “A colleague borrowed my tax return to photocopy it and lost it.”

Let’s not forget the tried and true ‘my dog ate my return” and the ever famous “paying taxes is voluntary” or “only federal employees have to pay taxes.”  Not only will these not absolve your client of tax filing responsibilities, they could cause the taxpayer more problems than just failure to file.

Oldies but goodies…

Blaming someone else: Typically, this is where YOU get blamed since Frank hired you to help file his return (even if you were just hired today). In some specific instances, this might work, but generally it doesn’t. The reason is that when the taxpayer signs his 1040 (yes the e-file form counts as signing the return), he is confirming under penalty of perjury that he knew what was on the return and agreed to submit it.

How about blaming the software? Tax prep software is a tool that taxpayers, as well as professionals, use to file taxes, for which the taxpayer is legally responsible. However, software luckily does not replace you, the professional. Remember that a good carpenter never blames his hammer.

The taxpayer can’t pay what he owes: This might be true, but it’s not a good enough reason for the IRS to let your client off the hook for not filing. Taxpayers have many payment options, including paying what they can (including nothing) when they file, and then setting up an installment plan to cover the balance. The taxpayers are charged interest and in most cases a fee to set up the payment plan, but no black sedan is going to pull up in front of your client’s house and drag him away.

It may also be possible to settle the debt for less than they owe via the IRS Offer in Compromise program if the taxpayer’s financial, and health or family situation have changed substantially.

Pleading confusion, ignorance, forgetfulness, complexity of the tax laws, differing IRS interpretations of new laws, etc.? Nice try Frank…your pleas will likely fall on deaf ears.

Reasonable reasons the IRS will accept:

What the IRS determines is reasonable cause. This will always be based on each individual’s facts and circumstances.

We will consider any reason which establishes that you used all ordinary business care and prudence to meet your federal tax obligations but were nevertheless unable to do so.

Some acceptable reasons include:

  • Fire, casualty, natural disaster, or other weather related circumstances;
  • Inability to obtain or locate records;
  • Death, serious illness, incapacitation or unavoidable absence (including being out of the country) of the taxpayer or a member of the taxpayer’s immediate family; and/or
  • Any other reason that establishes the taxpayer used all ordinary business care and prudence to meet their federal tax obligations but were nevertheless unable to do so.

Remember that not having the money to pay the tax is not reasonable cause for failure to file or pay on time.

However, the IRS says that the reasons why your client doesn’t have the money may help meet the reasonable cause criteria to abate or reduce potential failure-to-pay penalties.

Establishing reasonable cause: Does your client perhaps have a legitimate excuse for not filing on time? Provide the IRS with the following details:

  • What happened and when did it happen?
  • What facts and circumstances prevented the taxpayer from filing returns or paying the tax during the period of time he did not file and/or pay his taxes timely?
  • How do/did the facts and circumstances affect the taxpayer’s ability to file and/or pay their taxes or perform other day-to-day responsibilities?
  • Once the facts and circumstances changed, what actions did the client take to file and/or pay their taxes?

Documentation always helps: Can the reasonable cause claim be backed up?

Most reasonable cause explanations require that the taxpayer back up what he claims with some written proof. Examples include:

  • Hospital or court records, or a letter from a physician to establish illness or incapacitation, with specific start and end dates, or
  • Documentation of natural disasters — like the hurricanes in the South and Southeast or the wildfires in California — or other events that prevented compliance. The IRS has been quick to grant additional time to file in disaster stricken areas. I even remember the year the Chicago river flooded downtown Chicago businesses. Affected taxpayers were given additional time to file.

By the way, the IRS is much easier to work with if your client talks to them (and by extension, you) before the levy notices start arriving.

I’m pretty sure you know this, but as a point of education for people like Frank, you might tell him that the statute of limitations for a return that was never filed is unlimited…the moral of the story is to get the returns filed even if the client can’t pay what is owed. And to add insult to injury, if Frank is due a refund from tax years older than the 3-year statute limit for which he hasn’t filed, he won’t be given the refunds. However, if he owes tax, he has to pay it!

You can read up on this in the IRS Service Guide for both taxpayers and practitioners.

Best of luck helping Frank through final jeopardy!

by Tom O’Saben, EA

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