Discussion:Delinquent tax client (2006 and 2007)

I have a local carpenter who didn't file for 2006 or 2007 and needs to file those plus 2008. He is single and will be taking the standard deduction with a very easy schedule C. His gross income was very low for 2006 and 2007 (~$10K per year) and he probably has enough in mileage deductions and tool expense to bring that down. With the possibility of the EITC and his business expenses, he will probably end up owing very little or no tax for 2006 and 2007. He claims that he has NOT been contacted by the IRS in any way (a fact that he will sign an attestation to before we do business).

So here is what I have researched and concluded:

1) I will prepare his returns in year order.

2) I will have him go to the local IRS office and have the first page of his 1040 stamped as received for comfort before filing (I am not able to do this since I am not an EA or CPA).

3) If it turns out that he owes taxes for 2006 and/or 2007, he will receive a notice of tax due/demand for payment from the IRS once the returns are filed.

4) If it turns out he doesn't owe taxes for 2006 or 2007, no penalties or interest will apply.

5) Assuming he owes taxes and cannot pay those taxes, I will have him pay what he can and then visit the local IRS office and have him seek an installment agreement.

6) Since there has been no contact from the IRS, I will file them using the standard address for the return year.

Now for my questions....

1) Should I prepare all of the returns and file them at once or file 2006, wait for the IRS notice, and then file 2007?

2) My plan is to charge $800 for the 2006, 2007, and 2008. These are very easy returns to prepare with a simple schedule C and possibly an EITC. Sound fair to you?

I think I have this under control, I just want to make sure that I didn't miss anything. I tried very hard to get this right before posting as I am not trying to learn on your dime...really. The IRS process is somewhat complicated and further complication by the pitfalls of selective client memory, etc. I very much appreciate your help and hope to return the favor.

Thanks,

Michael

Thank you for the clarification, I knew about the separate envelopes but failed to include that in my OP.

I will have him mail them certified with return receipt requested.

He is supposed to be getting copies of all his documentation together, including his 1099's.

Thanks again,

Michael

I believe his gross income will be more than the filing requirements for him...2006 was $8,450 and 2007 was $8,750 (single, under 65).

However, I get where you are going regarding the cost verses benefit and I wouldn't file if he didn't have to...fee or not. I still have to sleep at night.

Thanks, Michael

Good point and reminder. I think in this case he will have both a net income from SE and will exceed the gross income for filing. He will have to file these returns.

I was mainly unsure as to whether I should file 2006 and wait or file them at the same time. It's that literal, "I want to see it in writing" gene of mine! :D

Thanks, you guys are the best.

Michael

I will have the client file Form 8821 appointing me to receive his tax file and talk to the IRS about these returns. I cannot set up any payment plans or other official duties but it will allow me to guard myself against the forgetful client and ensure what I am told and think the situation is corresponds with reality. After being burned by one client who was 'current'.....well except for the last 3-4 years....I am taking no chances.

I will fill out the returns and I assume he will owe just a little bit of money for all three years. Now for my question.

The following will be my advice for John Q. Taxpayer: For 2006 and 2007, remit the returns without payment (let the IRS calculate the penalties and interest, if any). For 2008 tax year, go ahead and pay that amount when he files so that he can at least avoid a 2008 failure to file penalty.

Pretty sound advice as far as I am concerned but when dealing with the IRS and their procedures, it is best to ask those that have been there.

Thanks,

Michael

Did you mean failure to pay penalty? If he files by April 15th, there would be no failure to file penalty.

Wow! $800 for three returns with simple Sch Cs? If I charged that much (in my area, anyway), I'd have no clients! I charge around $120 for a self-employed contractor, with a simple Sch C and nothing else. Takes about 10 minutes, so I'm happy.

You posted that you would mail all of the returns in seperate envelopes. Could you explain why? I have never had a problem with mailing them together. What do you know that I dont know?

This is not an issue if you are mailing them to a Revenue Officer, Revenue Agent or ACS Tech. who is expecting them.

I guess my question is this:

Is there any advantage to sending in the payment for the 2006 and 2007 tax amounts due over waiting until the IRS sends the bill with penalties and/or interest? And disadvantage?

My thinking is that by waiting to pay the bill from the IRS for 2006 and 2007 (once we know what it is), he will have some time to save AND will be able to pay 2008's tax bill to avoid more failure to pay penalties. I sincerely doubt, given his income, he will have any money with which to pay the bills all at once, including 2008's amount due.

As for my fee...I meet with clients on weekends and evenings and I also meet them in their home/place of work or nearby. I am, on this return, factoring in time speaking with the IRS and very much hand holding with regards to his records. I also have to buy the 2006 Taxact software because I started my practice in 2007. I thought--based on previous conversations with others here--my price was cheap. On a different but similar client who was already too far down the road with the IRS (liens pending), someone suggested I charge $3,000 minimum retainer. I will see how he arrives...if in good shape records wise, I will probably reduce it. If he hands me a shoebox, $800.

Thanks all,

Michael

If you send in an earlier tax return that owes taxes and then send in the current one with the payment, the IRS can still reclassify it.

You are better off paying the older taxes first and then if you have to you can set up a payment plan for the current year.

If there is a refund due on an "older" year and a balance due on a more recent one, I recommend mailing the old year a few weeks before the recent one and elect to have the refund applied as an estimated tax payment to the recent year. This will result in the credit being posted as of the due date of the return and reducing the amount on the recent return subject to late filing penalty and estimated tax penalty.

Most preparers have a policy of requiring advance payment of their fee in the case of nonfilers - which has been discussed on this forum. (i.e. if they're not afraid to stiff the IRS, they're sure not afraid to stiff the preparer.)

Irsfixer knows way more about this than I, but my first impulse would be, as you suggest, to pay the 2008 liability with the filing of the 2008 return, but wait for the IRS to bill the client for 2006 and 2007 amounts due. The down side of this would be that he might owe a month or two more in late payment penalties and interest, but at least he would have a handle on the entire amount owed, plus might be able to enter into an installment plan for both years combined.

BLRGCPA, I will see how this all plays out. If he has the money, I may go ahead and e-file 2008 with electronic draft of his account and then file 2006 and 2007 via the mail. Hopefully, the will not reclassify and will just send a bill with the penalties and interest.

I guess at this point, sending in a partial payment with the 2006 and 2007 returns would be somewhat of a mute point, except for the interest calculations going forward. He will already have encountered a failure to file and pay penalty and interest.

But I believe you guys have helped me understand all of this and I can't thank you enough.

Michael