Larry Lawler: Hi! I'm Larry Lawler, National Director of the American Society of Tax Problem Solvers. We are doing a series on solving common tax problems. Today our topic is going to be Unfiled Tax Returns. There is a number of things that people should realize when they are dealing with an unfiled tax return, that first of all, it happens to many people, for many different reasons. We seldom run into a taxpayer who didn't file their tax return just because they were trying to beat the government or escape the IRS, it's really an unusual situation to see that. We find someone who has gone through a divorce, a business failure, some medical problems, that sort of thing, that causes them not to file their tax returns timely. So generally speaking, it's good people who have had something bad happen to them, and you should be aware of that. It's a business matter to be addressed and it shouldn't be taken as a judgment of someone's character because they didn't file their tax return. There are a number of good people who get into that situation. In fact, typically, taxpayers who come to visit our offices have unfiled tax returns of four years, as the average number of unfiled returns.
When it comes to dealing with these unfiled tax returns, you have a number of years that have to be filed to conform with the IRS Policy Standard. I have actually encountered taxpayers who have got 20, 25 years of unfiled tax returns, because in the past, the IRS computers weren't nearly as good as they are today, at catching up to people who haven't filed their tax returns. Those people don't have to go back generally and file 25 years worth of tax returns, most often the records wouldn't be available anyhow. What the IRS Policy Statement is, is that a taxpayer who files six years worth of tax returns, when they have got that many unfiled, will be considered to be current. So six years worth of filing will catch them up. You should note that the IRS often will send letters to taxpayers now when they haven't filed timely, requesting that they file their tax return or that they contact the IRS to let them know perhaps why they haven't filed the tax return, if they weren't required to do so. So if the computers catch up to the taxpayer nowadays, they will get letters, but sometimes people have fallen through the cracks prior to that. Now let's move on for a moment to preparing these old tax returns. Many taxpayers don't have all of the information that they need to prepare their tax return. They fear that through moves or divorces, things of that nature, that they may have lost some of these records. The IRS will provide transcripts of what they have on file about the taxpayer, and we always suggest getting those transcripts to make sure that at least the items that are already reported to the IRS are included in those tax returns that are being filed late. An important consideration when filing these old tax returns has to do with whether or not the taxpayer should file the tax return as joint if he is a married taxpayer. First of all, he may have not been married at the time when the liability arose, he may have gotten married subsequent to that. He may have also had the business that had tax liabilities, that his spouse was not involved in. There is a number of different issues to be considered as to whether taxpayers should file jointly, if they are a married taxpayer, when they have old tax liabilities. Many times we end up suggesting to them that they pay the higher amount of tax and file separately to keep their spouse from being involved in their tax problem. When it comes to preparing these old tax returns, it is permissible, when you have no other way to do it, to use estimates of the expenses and in fact the income on the tax return. If you put them together, in the best way possible, using whatever information is available, you are probably doing as good a job as the Internal Revenue Service themselves could do if they prepared the return for you. We don't always have everything you need, but getting the return prepared and filed is critical. Sometimes you might use affidavits from third parties or even from the taxpayer themselves. You can write an affidavit. The difference is that an affidavit is a sworn statement as opposed to just making a statement about something. And usually when we use an affidavit, we have it signed and notarized and it carries more weight than just simply the person's word who prepared the tax return. In addition to the estimates and the affidavits, we sometimes also will do record reconstruction; taking detail records and putting them together and summarizing them, so that we can prepare the tax return. So some items on this topic that you need to remember is to get at least six years worth of tax returns filed. Get them done as quickly as possible and as accurately as possible, using IRS records and any other records you are able to put together. Get those returns filed, and then, even if you owe money, filing the tax return is still recommended, because, number one, you avoid the failure to file penalties or you stop them. Number two, you will get yourself into a position where you can now just deal with the dollar amount owed, you don't have a failure to file problem. From this, we are going to go into the ways to solve various tax problems, particularly when a taxpayer cannot afford to pay all of the tax that shows on these returns that we are filing. One of the items that we will discuss in the next item coming up will be the IRS Offer in Compromise Program.