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Back Tax CPA accountant discusses preparing back tax returns

Back tax CPA accountants approach each new Client differently since every case has unique circumstances. But, I’ll try to cover back tax basics in this post. Maybe it will show you some common pitfalls. Maybe it shows some potential effective strategies. Maybe it will help you decide if need a CPA to help.

Client receives an IRS Notice

Back tax CPA accountant explains back taxes

Strange but true. Back tax cases sometimes generate a refund. Sadly the IRS only issues refunds for three years. Every back tax CPA has a horror story about clients who lose large refunds. (910) 399-2705.

Most back tax Clients receive an IRS Notice, such as CP2000, that motivates them to find a CPA accountant. This starts the IRS timeline. I’ll write more on these issues below:

  • The demand on the IRS Notice is almost always higher than what an accurate back tax return shows.
  • I’ve seen many back tax cases generate a refund for the Client.
  • The IRS appears to value present and future tax compliance; the IRS isn’t generally punitive in back tax cases, except for the penalties of course.
  • The IRS timeline is generous, but there is timeline.
  • Doing nothing is the worst IRS back tax case strategy, although there are exceptions.
  • Doing nothing leads to an IRS tax lien for the full demand. Followed by an IRS tax levy where they can seize your assets and garnish your wages.

Every type of IRS tax return can be a back tax return case

Common back tax IRS forms I prepare:

  • S Corporation, Form 1120-S, U.S. Income Tax Return for an S Corporation.
  • Payroll tax forms, usually Form 941, Employer’s Quarterly Federal Tax Return.
  • Personal taxes, Form 1040. Sometimes with Schedule C, Profit or Loss From Business.

Is there a “typical” back tax Client?

No, I see Clients cross all demographics. Most back tax clients seem like perfectly normal folks. Even IRS Agents don’t seem judgmental. The IRS seldom takes back tax folks to criminal court. My point? It seems to me the IRS shares my perception that some normal folks just don’t file on time.

What happens if I don’t submit back tax returns

The IRS files a “substitute return” for you. Which almost always renders the highest of tax liability. Why? They base it on their information, most of which is income related. An accurate back tack return includes legitimate deductions and tax credits.

“Don’t just accept the IRS demand. Preparing accurate back tax returns reduces your tax liability and associated penalties.”
– Gary Bode, back tax CPA accountant

The IRS timeline

I think the IRS is generous with their time line. My perception? They have you hooked and can afford to keep you on the line for a while. However, generally speaking, your options decrease with time. Eventually the IRS places a tax lien for the amount they think is right. Followed by a tax levy where they seize your assets or garnish your wages.

“Don’t squander valuable defense time with procrastination. The worst back tax strategy is doing nothing”
– Gary Bode, back tax CPA accountant

There are exceptions of course. In some cases you can run out the clock on the statute of limitations and . This is rare. A common back tax case strategy is asking the IRS for more time.

Assume the IRS looks at back tax returns closely

I try to imagine what a skeptical IRS Agent might want to see for the “good pile, bad pile” decision. So I anticipate red flags and provide explanations and documentation.

Avoid shooting yourself in the foot

Back tax sfolks sometimes accidentally open themselves up to additional IRS scrutiny. Try to keep your case contained.

Be professional with the IRS representatives. Typically your case is just part of the job for them. Don’t make it personal. It never pays to poke the bear.

The bottom line of back tax return cases

Some cases generate a refund. But if you do owe, multiple strategies exist to make that as painless as possible. Examples include an Offer in Compromise, Installment Agreements, putting your account in currently not collectible status etc.

“Make sure the IRS knows you’ll be tax compliant the future. This includes factors like filing on time, making estimated tax payments and tax return accuracy.”
– Gary Bode, back tax CPA accountant

Examples of back tax clients losing legitimate IRS refunds

Every back tax CPA, IRS Agent and State Department of Revenue Officer has stories of clients losing legitimate refunds by not claiming them within the three tax year limit.

A man I respect contacted me on September 20th, 2013, or so, with a back tax case initiated by the IRS. They demanded thousands of dollars for the 2009 return. The Recession was tough on him and he had a rental property short sale in 2009. That meant there was an ordinary loss on the rental property that completely offset his taxable income. That rendered a $16,000 plus refund. But since the 2009 return was beyond the three year limit he lost that.

A professional woman contacted me with  a State initiated back tax case asking for seven years of back tax returns. A messy divorce and associated acrimony meant she couldn’t file her 2006 tax return. Why does the IRS and States take so long to ask for a back tax return? I don’t know. The IRS and State never contacted her until the Notice mentioned above. Her business lost money and she assumed she didn’t have to file. What she didn’t realize was that the divorce changed her IRS filing status form Married Filing Jointly to Head of Household. Her two children qualified for the Earned Income Credit meaning she had legitimate refunds for about $3,000 per year. Even though she never made any tax payments. She lost those refunds beyond the three year limit.

How to keep your back tax CPA costs low

The basic cost of preparing back tax returns is cheaper than if you’d filed year by year. Why? There’s efficiency in preparing sequential returns. But here are some typical factors that increase cost. Personally I don’t like running up charges on things that don’t decrease your tax liability. I even list these in our Letter of Engagement.

  • Obtaining power of attorney with the IRS and State so your CPA can act as your representative. Unfortunately, by the time a back tax case hits a CPA multiple issues exist that wouldn’t occur if you filed on time.
  • Obtaining accurate information for the back tax returns. While there’s no typical back tax client, there are common back tax issues. Sometimes I must help the Client reconstruct tax documentation. Reconstruction is perfectly legitimate but it takes time. Often there are associated costs for obtaining IRS records. Your bank and credit card companies charge for providing statements.
  • Letters and calls with the IRS and State.
  • Preparing the back tax returns out of sequence.
  • Looking to see if your case qualifies for an Offer in Compromise. Maybe the IRS will accept less than what you owe as payment in full. Pretty easy but it runs up a half hour or so of time.
  • Helping to setup IRS Installment Agreements. This includes some cash flow planning. It might include filling out Schedules and working with an Agent or Officer.
  • Dealing with extraneous IRS issues post filing. Things percolate through the IRS systems at different rates. There’s often overlapping Notices and Letters. Not your fault but not mine either.
  • Reviewing the IRS and State calculations after filing.
  • Asking for penalty abatement once the case clears.

Do you need a back tax CPA?

It depends. Here are some factors to consider:

  • Do you understand the tax issues involved for back tax returns?
  • How much tax liability is at stake?
  • Do know the IRS and State procedures for back tax returns?
  • How stressful is the back tax case to you? I know this is subjective. The effects of stress sometime include being irrational during back tax preparation.

I’m a back tax CPA with a virtual office to help Client regardless of where you live. The virtual office developed as this website started drawing Client beyond my geographic proximity. Even local Client find the virtual office more convenient. So if you’re uncomfortable with your back tax preparation consider giving me a call at (910) 399-2705 for a free consult.

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