Statute of Limitations from 2002

[raven1818]

I have new client with an old tax debt from 2002. The taxpayer failed to file the return due to a medical hardship. The IRS filed the return in 2004/5 based on the computer matching. The IRS made a mistake in counting as "taxable wage income" a 401K rollover which clearly shows on the 1099.  I do have the original copies of all 2002 tax documents including w2s, 1099s,

interest/dividend income.  Questions to all--Is it "too" late to amend his 2002 return?  We are considering preparing both an amended return and an offer in compromise.  The client does not have much money and is therefore not able to use one of these companies that negotiate with the IRS.  I definitely need everyone feedback on this one.

[Jack from Ohio]

I have new client with an old tax debt from 2002. The taxpayer failed to file the return due to a medical hardship. The IRS filed the return in 2004/5 based on the computer matching. The IRS made a mistake in counting as "taxable wage income" a 401K rollover which clearly shows on the 1099.  I do have the original copies of all 2002 tax documents including w2s, 1099s,

interest/dividend income.  Questions to all--Is it "too" late to amend his 2002 return?  We are considering preparing both an amended return and an offer in compromise.  The client does not have much money and is therefore not able to use one of these companies that negotiate with the IRS.  I definitely need everyone feedback on this one.

No need to file an amended if you have not filed an original. An original filed return will supersede the return created by the IRS. However, it is far too late to expect any refund. However, if the client owes tax, he will be liable for it. Offer in Compromise will not even be considered until ALL returns are filed up to date.

[Max W]

What the IRS did was prepare a Substitute for Return (SFR). What you want to do is prepare a 1040 and not a 1040X.

There are special addresses that SFR'd returns should be mailed to. If it is mailed to the normal address for returns in your area, it will eventually get to the ASFR Unit, but it will be delayed and this could cause problems for your client if the IRS is pursuing collections.  You can get the address from the IRS PPL line.

[Max W]

No need to file an amended if you have not filed an original. An original filed return will supersede the return created by the IRS. However, it is far too late to expect any refund. However, if the client owes tax, he will be liable for it. Offer in Compromise will not even be considered until ALL returns are filed up to date.

If one or more years have been SFR'd it is not necessary to file an original return for an OIC nor for an Installment agreement as long as all the other years are filed. SFR'd years cannot be discharged in bankruptcy.

[Jack from Ohio]

If one or more years have been SFR'd it is not necessary to file an original return for an OIC nor for an Installment agreement as long as all the other years are filed. SFR'd years cannot be discharged in bankruptcy.

I have yet to see an SFR that was correct. This is the reason to file the original return.

[Max W]

I have yet to see an SFR that was correct. This is the reason to file the original return.

I have seen many SFR's that would not be changed. Usually it is a single person that didn't have enough withheld on their W-2 or 1099R, even some 1099-MISC. where they cannot claim expenses. 

[Jack from Ohio]

I have seen many SFR's that would not be changed. Usually it is a single person that didn't have enough withheld on their W-2 or 1099R, even some 1099-MISC. where they cannot claim expenses.

Your practice must have far simpler returns than we see. NO SFR has ever been correct.

[jklcpa]

Raven, your client should definitely file a Form 1040 because the statute of limitations on assessments hasn't started until a return is filed. An SFR doesn't consititute a filing and does not start the statute of limitations running.

[kcjenkins]

If one or more years have been SFR'd it is not necessary to file an original return for an OIC nor for an Installment agreement as long as all the other years are filed. SFR'd years cannot be discharged in bankruptcy.

But you missed the point in the original post.  In this case, there IS a significant error in the SFR so a correct original should be filed.  Then, the amount owed, if some is still owed, can then be negotiated.  

[Max W]

Your practice must have far simpler returns than we see. NO SFR has ever been correct.

First of all you do not know what kind of practice we have, so why do make such a wild assumption.  Secondly, you make an absolute statement "NO SFR" has ever been correct. You are flat out wrong here as well.

Our practice is tax resolution and we get all kinds of tax delinquents, some going back into the nineties.  We see hundreds of SFR's every year and we prepare returns for those where it will make a difference.  However, there are number of SFR's where it would not make any difference.

[Jack from Ohio]

First of all you do not know what kind of practice we have, so why do make such a wild assumption.  Secondly, you make an absolute statement "NO SFR" has ever been correct. You are flat out wrong here as well.

Our practice is tax resolution and we get all kinds of tax delinquents, some going back into the nineties.  We see hundreds of SFR's every year and we prepare returns for those where it will make a difference.  However, there are number of SFR's where it would not make any difference.

30 years, 30,000+ total returns and we have yet to see an SFR that is correct.  A properly filed 1040 is always the right response to an SFR.  jklcpa also mentioned a point that could affect the client in the future.  An SFR that is correct can only have W-2 and/or 1099-R income.  We have never seen an SFR like that.  All have more things going on.

[kcjenkins]

I think Jack and Max are both somewhat correct.  Just not talking on quite the same level.  Yes, MOST SFRs are incomplete, but yes, sometimes what was omitted is not enough to make a significant difference in the bottom line.  However, I, like Jack, would still file the 1040, if only because the SOL never starts til a real return is filed.  If you just accept the SFR and negotiate on that, and the IRS later comes up with new info on that year, even 10 years later, they could come back on the client again.  Unlikely, but why chance it, when you already have done the work on the 1040 just to verify the SFR?

 

Of course, most SFRs are incorrect because the IRS gets W-2s and 1099s, etc, but they do not get anything on the deductions the client may have.  Nor do they take, in most cases, the best filing status.  They do single, no dependents, no business expenses, etc.   The exact same income, if the client is actually married with 3 kids, is going to have a very different bottom line.