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CPA Accountant explains Back Tax Returns and IRS Notices

back tax return CPA accountant

Here’s how a back tax CPA approaches a typical IRS case. I hope it’s helpful. I offer a free phone consult on back taxes. Our virtual means we can help you regardless of where you live. (910) 399-2705

Here’s how a CPA accountant approaches back tax returns. I’ll present sort of a “Back Tax Return 101” post, including insider tricks and IRS pitfalls.

IRS Notices in Back Tax Return Cases

Most back tax Clients call after receiving an IRS Notice. Sometimes this is years after the due date. So it shocks some Folks. The IRS, in my experience, doesn’t directly ask for a missing back tax return. Instead they kindly prepare a “substitute return” for you – please read below. These IRS Notices escalate in tone if you don’t respond, eventually culminating in a tax levy or garnishment of wages. Ouch! Such IRS Notices are typically computer generated. These automated Notices frustrate folks for many reasons. Often the IRS uses a fictitious Agent’s name to increase the sense of urgency. I think most back tax CPAs agree that responding earlier to an IRS Notice is better as the IRS doesn’t relent. One exception might be if the Statute of Limitations is about to expire.

Why is the Demanding so Much? The IRS “substitute return”

If the IRS doesn’t receive a return from you, they sometimes ask for it. Later, they prepare a “substitute return” on your behalf using information they have on file and bill you for taxes due. Plus penalties. Plus interest. Since the IRS collects the most data on income, this substitute return doesn’t include legitimate deductions or tax credits. Note I’ve heard clients say that IRS Agents encourage them to file the actual back tax return. My impression? The IRS wants an accurate return and their Notices are just a way of getting your attention. They don’t really expect what they demand. But they’re covering the bases if you won’t comply.

Filing Back Tax Returns can Result in Refunds!

Again, once you file accurate back tax returns, with your legitimate deductions and tax credits, it sometimes results in a tax refund. If so, much of the penalty disappears too.

Back Tax Return Refunds are Lost after Three Years!

Every CPA sees Client refunds disappear because the back tax returns weren’t filed before the three-year limit. Poof. Every CPA accountant has a horror story to tell.

Asking for more time to prepare the back tax returns

Sometimes back tax Clients call me only when the IRS finally demands an exorbitant sum and threatens a tax levy, seizure of assets or garnishment of wages. So I ask for more time. I’ve never had such a request denied. Nine weeks is routine.

Tax Form 2848 Power of Attorney

I usually get a limited power of attorney (Form 2848) from the client to which allows me to speak with the IRS, and of course, the State if applicable. This allows me to pull information from the IRS.

Reviewing the IRS information

This includes reviewing the IRS Notices to see what their perspective is. I also check information the IRS has on file for the client, for each tax year involved. Note the States get much of their information from the IRS.

“Filing accurate back tax returns decreases the amount of tax, interest and penalties due, for the reasons stated above. I’ve seen many back tax returns generate refunds. But I’ve also seen many refunds vanish because the Client waited too long to file.” 
– Gary Bode, CPA accountant

A good CPA accountant listens to your side of the back tax situation

I listen carefully to the Client’s side of the story.

Determining your true IRS tax obligation

Now that I know the IRS position and your side of the story, it’s time to looks at what you actually owe. Again, sometimes back tax returns result in refunds. CPA accountants earn their keep by finding you all the possible tax deductions and credits you’re entitled to. Of course we look for IRS errors and breaches of their own rules too. Sometimes we help re-construct missing documentation.

Paying less than you owe on the back tax returns

If you do owe back taxes I always looks at the possibility of an Offer in Compromise. It’s quick and easy. It’s worth determining if the IRS will accept less money than you owe as full payment. I touch on “payment plans” and installment agreements later. When applicable, an Offer in Compromise (IRS tax Form 656) can sometimes mean paying pennies on the dollar.

An example of why your back taxes are less than the IRS demand

Again, the IRS substitute return isn’t based on all the information allowed on the tax return. Here’s an example. If the IRS has a Form 1099-MISC on file for you, they want to collect taxes on all of it, let’s call the demand $2,800 for conversational purposes. But you have the right to offset that income with legitimate business expenses. So, if you had $10,000 of income and $7,500 of expense, you only pay tax on the $2,500 of profit. Your correct tax bill? Maybe $700, not $2,800.

“Try not to incriminate yourself when dealing with the IRS. Don’t give them any reason to audit the back tax returns. I look for IRS red flags and then explain them carefully on the tax return.” 
– Gary Bode, CPA accountant

Ensuring the IRS and State correctly determine your penalties and interest

When you file multiple back tax returns simultaneously, they percolate through the system in odd ways. Despite proactive cover letters, IRS issues sometimes “cross in the mail” and IRS Notices continue despite compliance. After these minor bumps in the road, back tax CPAs offer to reconcile what they believe is true against IRS and States calculations.

Helping you pay if you do owe taxes

The IRS, State or CPA can help you setup a payment plan or Installment Agreement after filing back tax returns.

IRS tax lien release and withdrawal

If the IRS places a tax lien on you it can ruin your credit for seven years even if you’ve paid the IRS. Yikes. You have to ask them to withdraw the tax lien.

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