Back Taxes | Back Tax CPA offers Advice on handling un-filed Business and Personal Tax Returns | IRS Notices

Here’s how one CPA approaches back taxes, un-filed tax returns and IRS Notices. Hi, I’m Gary Bode, a back tax CPA with a virtual office to serve you regardless of where you live.

• Every Client is different, but here are some issues that factor into back tax cases.
• I’ll warn of potential back tax traps.
• Hopefully this will help you decide how to handle your particular situation.

Here’s an earlier post on back taxes and typical issues.

Every back tax CPA and IRS Agent has stories about taxpayers losing refunds because of filing late.

IRS Notices and Letters

Back tax clients generally call me after receiving some IRS Notice demanding back taxes, penalties and interest.

• Understand your IRS Notice. Read it twice. Don’t assume anything. Sometimes a call to the IRS helps explain back tax notices.
• Don’t ignore an IRS Notice. The IRS is tenacious and persistent. Eventually they put a federal tax lien on your assets, or worse, seize them.
• Take some action on the IRS Notice.
• Understand the IRS timeline. Many back tax clients get boxed in.
• Remember your State is close behind the IRS.
• Remember the IRS assumes it’s correct on back taxes, penalties and interest. You must prove they’re wrong.
• Many back tax IRS Notices use a fictional Agent! It’s really a computer you’re dealing with.
• Expect frustration with overlapping IRS Notices.

The amount of Back Taxes and Penalties Demanded by the IRS

In my experience, when the IRS demands back taxes secondary to un-filed tax returns, the dollar amount of back tax drops dramatically when we submit correct returns. Sometimes a refund is generated. Suprising but true.

• Filing correct returns, or amending prior returns, almost always drops the amount of back tax due.
• The IRS prepares “substitute returns” if you don’t file with them, using information they have on record for you or your company.
• The IRS mostly collects income or revenue data. So the substitute returns don’t consider legitimate tax deductions or credits.
• Many back tax CPAs feel the IRS doesn’t even want the amount demanded in their initial Notices; they just want your un-filed tax returns.
• Generally the penalties decrease when you file your back tax returns. Back taxes CPAs routinely ask the IRS to abate penalties.
• If your back taxes decrease, the interest decreases too.

Asking for more time to prepare the back tax returns

Even if the IRS has lost patience with you, they generally allow a CPA extra time to handle the case.

Timeline issues on Back Taxes

• Don’t waste borrowed time. The IRS is initially generous. But they run out of patience eventually.
• Keep in mind the three-year limit on collecting refunds. Honestly, I’ve seen cases where Clients miss thousands of dollars in legitimate IRS and State refunds by filing late.
• The IRS Statute of Limitations is generally 10 years to collect back taxes. Some clients get lulled into a false sense of security that the IRS forgot about them. And who knows, maybe they do forget about some folks.
• Remember your State may have different time lines. California can chase you down forever.

Amending Prior Tax Returns

The IRS can pursue you for un-filed tax returns or errors found on previous tax returns.

• Again the IRS assumes it’s calculations of back taxes are correct once they’ve flagged your previous return. You have to prove them wrong.
• It is perfectly legitimate to amend a prior tax return.

Here’s a real life example of amending a prior tax return.

• A rental property client, new to real estate, got tagged on a past return because he collected some rent and didn’t claim it on his tax return; in this example Schedule E of Form 1040. But the IRS received a Form 1099-MISC from the renter.
• The IRS sent him a notice a few years later demanding back taxes, interest and penalties.
• But he had legitimate rental property expenses during the year he didn’t claim either.
• Amending the tax return showed he actually lost $5500 or so on the rental property.
• This wiped out his back taxes.
• This wiped out his interest.
• This decreased his penalties.
• This generated a $1,000+ refund.

Here’s an earlier post on amended taxes.

Preparing Un-Filed Tax Returns

• Remember your un-filed State taxes too. I think back tax CPAs worry more about the State returns than the IRS.
• Prepare your un-filed back tax returns in chronological order.
• Make sure your un-filed tax returns contain all the information the IRS has on file for that tax year. Back tax CPAs routinely pull your IRS reports.
• Assume your back tax returns will be audited.
• Organize your documentation so there’s no reconstruction required if the IRS audits you.
• Compare your un-filed returns to each other. The IRS does.
• Explain any unusual circumstances. Back tax CPAs assume you’ll be audited, so we look for potential IRS red flags. I use supplemental schedules to explain unusual circumstances. Sometimes I send corroborating documentation with the return.
• Don’t open up other tax issues with the IRS. Some folks shoot themselves in the foot.
• Back tax CPA fees for preparing sequential returns are usually cheaper than if they were prepared on time.
• Here’s propr post on how to work with a tax accountant CPA.

Hints on working with a Back Tax CPA

• Let them prepare your back tax returns in chronological order. It’s cheaper.
• Cooperate fully. Give your CPA what they want, when they want it. It’s cheaper.
• Don’t push the time line. Expedited work costs more.
• Expect some prep time and fees. Back tax CPAs often look over old tax returns, examine IRS Notices, pull IRS transcripts, obtain Power of Attorney, write letters requesting more time etc.
• Don’t misrepresent. A good back tax CPA only needs the truth to optimize your tax position. We push into gray areas of the tax code when warranted. Misrepresentation sometimes works initially, only to have the IRS come back and audit your back tax return.
• The IRS seems to have more difficulty resolving back taxes across multiple years than they do with current tax returns. So there are often little, but frustrating issues that pop up after filing.

Paying the IRS

• Ask for an IRS agent to handle the case. Sometimes that helps.
• Here’s an a prior post on requesting non collectible status.
• Ask for penalty abatement, they understand unusual circumstances.
• Discuss cash flow with your CPA
• See if you can pay less than the amount owed. I think most back tax CPAs look at the infamous Offer in Compromise technique. The IRS relaxed “pennies on the dollar” qualifications a few years ago.
• The IRS often accepts monthly payments. Here’s a prior post on Form 9465 Installment Agreements.

Tax Traps

• Don’t get caught in the trap of locking into a tight Installment Agreement and then getting hit with current taxes due and current estimated taxes due. Consider including the current tax year into any IRS Installment Agreement.
• Don’t give the IRS all your money. Making an extra payment, or a larger down payment, doesn’t buy any goodwill if you miss a payment. Go for the lowest monthly amount, the lowest down payment and the longest timeline. Then save to pay your entire debt off early.
• Expect the IRS to scrutinize your back tax returns. Proactively look for red flags. Present air tight back tax returns with supplemental info if needed.
• The State’s back tax obligations can blindside a client.
• Don’t open up other tax issues when dealing with the IRS and State.

Lien Releases and Withdrawals

• Here a prior post on Form 12277 and the federal tax lien release and withdrawal. Otherwise your credit score is affected for seven years.
• Here’s prior post on Form 12277 and the federal lien process.

IRS Account Reconciliation

Even if you generated refunds by filing back tax returns, reconcile the account. It gets confusing quick.

I’m a back tax CPA that handles all phases of IRS resolution. Please read some of the hundreds of posts on this website to gauge my ability and philosophy. For a free phone consult call (910) 399-2705.

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