Best Way to Handle Unfiled Tax Returns?

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Mr. Moieties
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Best Way to Handle Unfiled Tax Returns?

Post by Mr. Moieties » Wed May 06, 2020 5:15 pm

I'm hoping to help a family member who is in a pickle as a result of not filing tax returns for 15-plus years (neither federal, state, nor local). After discussing the situation at length, it seems his situation boils down to the issues outlined below. Simply put, what advice do you have to get him caught up on his taxes in the least financially painful way -- hopefully including a negotiated settlement with the IRS that would eliminate or minimize interest and penalties?

FINANCIAL/JOB-RELATED INFO:
As far as I can tell, his tax situation doesn't appear to be particularly complicated. Here's a run-down:
1. He has earned the vast majority of his income as an independent contractor and has 1099-Misc forms for most but not all years from 2005 to 2019.
2. He has not had any taxes withheld and has not made any estimated tax payments.
3. He racks up a lot of work-related mileage on his car (20,000-plus miles annually -- with gas, tolls, maintenance & repair expenses).
4. He has a home office space of 8' x 8'.
5. He probably doesn't have sufficient funds to pay his entire tax liability all at once, so we're wondering if the IRS is typically receptive to payment plans. Any advice on this point would be greatly appreciated.
6. He owns an automobile but no real estate or other significant assets.

ISSUES/QUESTIONS:
1. Where can he get missing income (1099-Misc) documents? Are they accessible from the IRS website, or will he have to ask the issuers of the 1099 forms to send him duplicate copies?
2. He's capable of preparing tax returns himself (provided they aren't more complicated than described, which I believe would be gross income less deductions for mileage, tolls, and perhaps automobile maintenance and repair expenses, as well as the home office space), so would it make better sense for him to hire a CPA to prepare returns or just prepare them himself?
3. Is he legally required to file returns for all missing years? If not, how far back will he have to go? Also, should he file the most recent year's return first, or go back and start with the oldest return and work forward?
4. Can all taxes be completed online, or will he need to get paper forms for some years? (I assume older tax form are available for download at the IRS website, but if not, do you know where to get them?)
5. When it comes to negotiating with the IRS for a payment plan and to waive or reduce interest and penalties, would he get the same results by negotiating on his own behalf as he would by hiring a tax lawyer or CPA to represent him? If he'd fare better by hiring a professional, would you recommend a lawyer or CPA? (Seems a CPA would charge less.)
6. Are there other issues we should be aware of or questions I should be asking? I'm hoping to help him deal with this unfortunate situation once and for all, so if I'm missing anything, please let me know.

Thanks to all who respond. Your thoughtfulness and knowledge are greatly appreciated.

mhalley
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Re: Best Way to Handle Unfiled Tax Returns?

Post by mhalley » Wed May 06, 2020 8:07 pm

With this situation, I would get the help of an enrolled agent or tax lawyer.

https://www.irs.gov/taxtopics/tc153
In other words, there's no statute of limitations for assessing and collecting the tax if no return has been filed.
https://www.nolo.com/legal-encyclopedia ... tions.html

I would probably go with the lawyer.
not filing taxes for 10 years or more exposes you to steep penalties and a potential prison term.
https://tax.findlaw.com/tax-problems-au ... -more.html

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cheese_breath
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Re: Best Way to Handle Unfiled Tax Returns?

Post by cheese_breath » Wed May 06, 2020 8:21 pm

15 years evading taxes? You're a better man than I OP. Unless it was a parent I'd tell him/her, "You got yourself into this mess. You knew what you were doing. Get yourself out." But that's me.
The surest way to know the future is when it becomes the past.

MarkNYC
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Re: Best Way to Handle Unfiled Tax Returns?

Post by MarkNYC » Wed May 06, 2020 9:11 pm

There is no easy answer, but some additional information may be useful:

1. How old is he? Single or married?
2. Approximately how much did he earn annually over those years, before expenses?
3. What is the nature of his business, and how much is he currently earning (or was before Covid shutdown)?
4. Does he have a retirement account, such as IRA or 401K? If so, how much?
5. Any other debts?
6. Any likely source of borrowing funds to pay back taxes, such as wealthy friend or relative?
7. Where does he live and how much rent does he pay?
8. Any particular reason for nonfiling, other than negligence?
9. Any recent communication from or to the IRS?
Last edited by MarkNYC on Wed May 06, 2020 9:59 pm, edited 1 time in total.

123
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Re: Best Way to Handle Unfiled Tax Returns?

Post by 123 » Wed May 06, 2020 9:23 pm

He should file his 2019 taxes immediately and then proceed to file past returns. Once the 2019 return is prepared and filed the relative will have a model for prior years.It's may be easiest to work the years backwards 2019, 2018, 2017...

The IRS is ready to help you. They have copies of tax forms for more than the last 20 years online at https://apps.irs.gov/app/picklist/list/ ... ation.html
The closest helping hand is at the end of your own arm.

toofache32
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Re: Best Way to Handle Unfiled Tax Returns?

Post by toofache32 » Wed May 06, 2020 9:40 pm

Serious question....what changed that makes him want to suddenly pay his taxes?

Katietsu
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Re: Best Way to Handle Unfiled Tax Returns?

Post by Katietsu » Wed May 06, 2020 9:40 pm

I am surprised that he has been receiving 1099 forms for 15 years yet has never been contacted by the IRS.

He can request a wage and income transcript from the IRS. Since he has not filed for so long, he will not be able to receive it online. I think he can still make his request online with the transcripts to be mailed to him. These are available for the last 10 years.

Please respond to MarkNYC. Based on the limited information provided, he could be owed a refund or he could be looking at jail time, particularly if they find him before he goes to the IRS. I would add - did he have dependents(especially kids) for any of those 15 years?

montanagirl
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Re: Best Way to Handle Unfiled Tax Returns?

Post by montanagirl » Wed May 06, 2020 9:47 pm

If he hasn't filed all these years I seriously doubt that he's kept the detailed logs necessary to document his vehicle usage. Or any other expenses for that matter.

And he will need to file all missing years before the IRS will talk to him about a payment plan.

I wouldn't touch this with a ten foot pole.

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whodidntante
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Re: Best Way to Handle Unfiled Tax Returns?

Post by whodidntante » Wed May 06, 2020 10:12 pm

I would refrain from posting to public forums about it, and refrain from talking about it. I would remove the postings you have done. I would encourage said family member to seek legal advice. And then I would hope to never hear of the matter again.

delamer
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Re: Best Way to Handle Unfiled Tax Returns?

Post by delamer » Wed May 06, 2020 10:23 pm

Has he also not paid into Social Security or Medicare (for the 1099 income) all this time?

bsteiner
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Re: Best Way to Handle Unfiled Tax Returns?

Post by bsteiner » Thu May 07, 2020 8:26 am

How to proceed may depend upon the specific facts. So he should consult with counsel.

Does he live in or earn income in a state that has a state income tax? If so, he'll have to consider that.

But this happens more often than one might think.

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cheese_breath
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Re: Best Way to Handle Unfiled Tax Returns?

Post by cheese_breath » Thu May 07, 2020 9:00 am

Katietsu wrote:
Wed May 06, 2020 9:40 pm
... he could be owed a refund ...
What's to be refunded? According to OP he didn't have any withholding or pay any estimated tax.
The surest way to know the future is when it becomes the past.

cmb16
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Re: Best Way to Handle Unfiled Tax Returns?

Post by cmb16 » Thu May 07, 2020 9:16 am

1. If 1099-MISC were filed for him, he could view them by pulling an IRS transcript online.
2. Given he is already out of compliance, his past returns would be paper filed and most likely subject to higher scrutiny. Even if he is not already under audit/review as a non-filer, I'd suggest a competent accountant to ensure its done right to not draw any more attention than necessary.
3.Tax compliance with IRS is deemed 6 years. No need to go back further than that.
4. Can only e-file last 3 years.
5. Basic payment plan is same regardless, but there are different options for repayment, and paperwork to fill out can be more arduous depending on amount owed. There are thresholds in terms of money owed that can cause issues, i.e. if owed is high enough, has to submit financial statements, which put his assets at risk, etc. Get an accountant to walk you through those landmines.
6. My experience, business owners stink at generating accurate P&L for tax filing. Get a competent person to do it, 9 times out of 10, unless the business is super simplistic, I can generate more accurate P&L that limits their liability than they can, by virtue of understanding what is deductible, how to account for interest/principal, deprecation considerations, etc. If he wants to do any offers in compromise, etc, you need an accountant to have a good degree of certainty of being successful. Also, best to be forthcoming and get straight on his own volition, than have the IRS come knocking.

jebmke
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Re: Best Way to Handle Unfiled Tax Returns?

Post by jebmke » Thu May 07, 2020 10:14 am

123 wrote:
Wed May 06, 2020 9:23 pm
He should file his 2019 taxes immediately and then proceed to file past returns. Once the 2019 return is prepared and filed the relative will have a model for prior years.It's may be easiest to work the years backwards 2019, 2018, 2017...
When I have had clients with multiple years outstanding, I normally file the oldest one first and then in chronological order in case there are carryover items that affect sequential years.
When you discover that you are riding a dead horse, the best strategy is to dismount.

bsteiner
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Re: Best Way to Handle Unfiled Tax Returns?

Post by bsteiner » Thu May 07, 2020 12:34 pm

cmb16 wrote:
Thu May 07, 2020 9:16 am
...
2. Given he is already out of compliance, his past returns would be paper filed and most likely subject to higher scrutiny. Even if he is not already under audit/review as a non-filer, I'd suggest a competent accountant to ensure its done right to not draw any more attention than necessary.
...
5. Basic payment plan is same regardless, but there are different options for repayment, and paperwork to fill out can be more arduous depending on amount owed. There are thresholds in terms of money owed that can cause issues, i.e. if owed is high enough, has to submit financial statements, which put his assets at risk, etc. Get an accountant to walk you through those landmines.
6. My experience, business owners stink at generating accurate P&L for tax filing. Get a competent person to do it, 9 times out of 10, unless the business is super simplistic, I can generate more accurate P&L that limits their liability than they can, by virtue of understanding what is deductible, how to account for interest/principal, deprecation considerations, etc. If he wants to do any offers in compromise, etc, you need an accountant to have a good degree of certainty of being successful. Also, best to be forthcoming and get straight on his own volition, than have the IRS come knocking.
Some good points here. Many people can prepare their own returns if all they have are wages, interest income, and other common items. But not very many people can prepare their own returns if they have a business.

As to how the IRS will look at the returns, I haven't found the IRS to look more closely at late returns, even if they're several years late, than at timely filed returns. However, they may be more likely to look at returns with business income. In any event, the likelihood of audit shouldn't be a factor in deciding how to proceed. He should file returns that are as accurate as he can. He's signing under penalty of perjury that the returns are correct to the best of his knowledge.

As you point out, depending on his income, his assets, his future prospects, his ability to borrow money, and how much he owes, he can ask to pay in installments, or he can ask if the IRS will accept less than the full amount due. That will come later. The first step is to file the returns.

The accountant should coordinate his/her work with the lawyer.

trueblueky
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Re: Best Way to Handle Unfiled Tax Returns?

Post by trueblueky » Thu May 07, 2020 3:19 pm

Mr. Moieties wrote:
Wed May 06, 2020 5:15 pm
I'm hoping to help a family member who is in a pickle as a result of not filing tax returns for 15-plus years (neither federal, state, nor local). After discussing the situation at length, it seems his situation boils down to the issues outlined below. Simply put, what advice do you have to get him caught up on his taxes in the least financially painful way -- hopefully including a negotiated settlement with the IRS that would eliminate or minimize interest and penalties?
Same state every year? I would prepare federal first.
FINANCIAL/JOB-RELATED INFO:
As far as I can tell, his tax situation doesn't appear to be particularly complicated. Here's a run-down:
1. He has earned the vast majority of his income as an independent contractor and has 1099-Misc forms for most but not all years from 2005 to 2019.
Get transcripts from IRS.
2. He has not had any taxes withheld and has not made any estimated tax payments.
The self-employment taxes could easily be more than any income tax owed.
3. He racks up a lot of work-related mileage on his car (20,000-plus miles annually -- with gas, tolls, maintenance & repair expenses).
If the number of work sites is small, the mileage may be easy to determine. I think mileage would be much easier to determine than actual expenses. Tolls and parking are deductible either way.
4. He has a home office space of 8' x 8'.

Since tax year 2013, this can be deducted per square foot, which is simpler than apportioning house expenses.
5. He probably doesn't have sufficient funds to pay his entire tax liability all at once, so we're wondering if the IRS is typically receptive to payment plans. Any advice on this point would be greatly appreciated.
6. He owns an automobile but no real estate or other significant assets.

ISSUES/QUESTIONS:
1. Where can he get missing income (1099-Misc) documents? Are they accessible from the IRS website, or will he have to ask the issuers of the 1099 forms to send him duplicate copies?
2. He's capable of preparing tax returns himself (provided they aren't more complicated than described, which I believe would be gross income less deductions for mileage, tolls, and perhaps automobile maintenance and repair expenses, as well as the home office space), so would it make better sense for him to hire a CPA to prepare returns or just prepare them himself?
3. Is he legally required to file returns for all missing years? If not, how far back will he have to go? Also, should he file the most recent year's return first, or go back and start with the oldest return and work forward?
4. Can all taxes be completed online, or will he need to get paper forms for some years? (I assume older tax form are available for download at the IRS website, but if not, do you know where to get them?)
5. When it comes to negotiating with the IRS for a payment plan and to waive or reduce interest and penalties, would he get the same results by negotiating on his own behalf as he would by hiring a tax lawyer or CPA to represent him? If he'd fare better by hiring a professional, would you recommend a lawyer or CPA? (Seems a CPA would charge less.)
6. Are there other issues we should be aware of or questions I should be asking? I'm hoping to help him deal with this unfortunate situation once and for all, so if I'm missing anything, please let me know.

Thanks to all who respond. Your thoughtfulness and knowledge are greatly appreciated.

Katietsu
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Re: Best Way to Handle Unfiled Tax Returns?

Post by Katietsu » Thu May 07, 2020 4:13 pm

cheese_breath wrote:
Thu May 07, 2020 9:00 am
Katietsu wrote:
Wed May 06, 2020 9:40 pm
... he could be owed a refund ...
What's to be refunded? According to OP he didn't have any withholding or pay any estimated tax.
I agree the chance of a refund is low in this situation. But I once helped a woman who had not filed in 7 years with no payments made. But she had kids with her for most of the unfiled years. So, child tax credits and EIC exceeded income and self employment taxes resulting in a refund due.

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cheese_breath
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Re: Best Way to Handle Unfiled Tax Returns?

Post by cheese_breath » Thu May 07, 2020 4:26 pm

Katietsu wrote:
Thu May 07, 2020 4:13 pm
cheese_breath wrote:
Thu May 07, 2020 9:00 am
Katietsu wrote:
Wed May 06, 2020 9:40 pm
... he could be owed a refund ...
What's to be refunded? According to OP he didn't have any withholding or pay any estimated tax.
I agree the chance of a refund is low in this situation. But I once helped a woman who had not filed in 7 years with no payments made. But she had kids with her for most of the unfiled years. So, child tax credits and EIC exceeded income and self employment taxes resulting in a refund due.
I hope brother doesn't have any kids for OP to support too. :oops:
The surest way to know the future is when it becomes the past.

Outer Marker
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Re: Best Way to Handle Unfiled Tax Returns?

Post by Outer Marker » Sun May 10, 2020 2:16 pm

This is not a DIY project. I would definitely hire an experienced tax attorney and CPA. Willful neglect and tax evasion for 15 years could have criminal as well as civil penalties.

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celia
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Re: Best Way to Handle Unfiled Tax Returns?

Post by celia » Sun May 10, 2020 2:45 pm

123 wrote:
Wed May 06, 2020 9:23 pm
He should file his 2019 taxes immediately and then proceed to file past returns. Once the 2019 return is prepared and filed the relative will have a model for prior years.It's may be easiest to work the years backwards 2019, 2018, 2017...
After getting the income records on file with the IRS, I would have him file the oldest one that corresponds with the oldest record the IRS has on him. The oldest one needs to be calculated first since capital losses, tIRA basis, refunds (from tax credits), and other things I can’t think of off the top of my head, roll into the following year’s return.

My question, though, is if the IRS is in contact with him asking for past returns. If he hasn’t changed his address and the IRS hasn’t contacted him all these years, they probably think he doesn’t need to file based on the 1099s they have. Or maybe a spouse has been filing on his behalf.

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celia
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Re: Best Way to Handle Unfiled Tax Returns?

Post by celia » Sun May 10, 2020 3:25 pm

Once he has his records from the IRS and combines it with the records he has and sorts it all by year, he should look to see if there is a AARP TaxAide location open (after Stay at Home ends). Their assistance and advice is free. They’ve helped people in similar situations in the past. At least they will help assess the whole situation going forward.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

HomeStretch
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Re: Best Way to Handle Unfiled Tax Returns?

Post by HomeStretch » Sun May 10, 2020 4:09 pm

The Social Security Administration updates the earnings records of self-employed people from their tax returns. So your family member currently has 15 years of $0 income for SS/Medicare purposes. After the returns are filed, the family member should check his/her SS record to make sure the earnings are updated.

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FiveK
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Re: Best Way to Handle Unfiled Tax Returns?

Post by FiveK » Mon May 11, 2020 12:28 pm

celia wrote:
Sun May 10, 2020 3:25 pm
Once he has his records from the IRS and combines it with the records he has and sorts it all by year, he should look to see if there is a AARP TaxAide location open (after Stay at Home ends). Their assistance and advice is free. They’ve helped people in similar situations in the past. At least they will help assess the whole situation going forward.
"Help assess" is probably the best TaxAide could do here. The home office deduction alone would put the return out of scope for TaxAide.

Retired1809
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Re: Best Way to Handle Unfiled Tax Returns?

Post by Retired1809 » Mon May 11, 2020 12:54 pm

Wondering why the OP never posted again. This is not the kind of discussion that adds value to our Bogleheads group.

SRenaeP
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Re: Best Way to Handle Unfiled Tax Returns?

Post by SRenaeP » Mon May 11, 2020 1:15 pm

delamer wrote:
Wed May 06, 2020 10:23 pm
Has he also not paid into Social Security or Medicare (for the 1099 income) all this time?
That realization may be what prompted the relative to want to file returns now.

I'm aware of a person who had a somewhat similar situation. It was a painful surprise when she went to file for SS but didn't have enough credits. Long story short, she ended up getting a menial job for approx. a year to get enough credits and now receives a very small amount of SS.

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celia
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Re: Best Way to Handle Unfiled Tax Returns?

Post by celia » Tue May 12, 2020 12:06 am

Retired1809 wrote:
Mon May 11, 2020 12:54 pm
Wondering why the OP never posted again. This is not the kind of discussion that adds value to our Bogleheads group.
One response suggested not posting this on a public forum, like this one. That alone implies ‘stop posting about this’.

Personally, I think this is a more common issue than the average Boglehead realizes. I only worked with the TaxAide program for 2 years, and we saw several cases like this at my 6-tax-preparers site that was open 8 hours a week.

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