Making corrections preceding sol year

[Margaret CPA in OH]

New client has huge mess. Married 2008, set up home office 2009, had preparer do taxes. All 'office expense' lumped together, $6000+. This included $2200 computer, $1700 design software, office furniture, etc. about $4600 total.

Marriage soured, self-prepared returns in 2010 and 2011 and more. Client filed 2011 as MFS, taking spouse as dependent, and itemized deductions. Spouse was drug addict then and likely didn't even file so no itemized deductions but house was all hers. So I am amending 2011 by deadline and will also amend messed up 2012 and 2013. How best to input the undepreciated or Sec. 179 assets for 2011 and forward? 2009 is out of statute so just add assets in 2011 as Sec. 179 expensed? I think they need to be listed but not sure how.

Is it reasonable to file amended 2011 with itemized deductions having no proof whether spouse did or not? It will make a significant difference especially after removing spouse as dependent. Or just leave everything alone?

Bigger issue is that she is stuck with tax, penalty and interest bills adding up to about $30,000 which include 2009-2013. Ex hid income, declared bankruptcy and 'left the building' so she is stuck with mfj balances due and now her own which she couldn't pay due to joint liability.

She wants everything cleaned up as much as possible before remarrying. My thinking is to at least address those still within statute.

Thoughts?

[Lee B]

How about filling a 3115 to clean up the fixed asset mess.

 

Then they would show up on the current return with the correct accumulated depreciation etc.

without running everything thru the prior year's amendments.

[Lion EA]

You don't have to audit your client, so if he says he doesn't think spouse filed, then go with that and let him itemize.  If the spouse did not file/had no income, can't he claim her as a dependent on his MFS return?  One of the very few exceptions to not claiming spouse as dependent?  And, if the major mess is depreciation, I agree to use 3115 instead of amending all those prior years.  Unless you have other major reasons to amend anyway.  Innocent spouse?  Or, is it injured spouse?  For back returns and current.  Don't feel guilty if you don't have time to research the multiple problems for multiple years for a new client.  Do what you can and let the rest go until after tax season.

[Margaret CPA in OH]

Thanks for great feedback, cbslee and Lion. The client is a woman but no matter. Now ex-spouse was not living with her in year she filed MFS so I don't think the rare exception could apply as she was not supporting him. She has no firm idea of whether he was working or whether he filed a return.

There are other issues to warrant amending the intervening years' returns, primarily home office deduction errors. HRB used approximate value much higher than original value at date in service and didn't exlude land. And there is more. "I just answered the questions on Turbo Tax, I didn't know." I will look again for other significant issues and reevaluate, though.

If I do the 3115 for 2014, do I still amend for the other errors? If so, how to handle the corrections in the 3115?

I believe she was an injured spouse but maybe not innocent. She did sign the returns but the only open year is the 2011 with the MFS issue so that wouldn't apply. She divorced in 2012 but continued making errors on TT. And she has been paying on these returns since 2011 for 2009 and 2010. Apparently the ex is not contributing anything and IRS has her on the hook.

She cries every time we meet or talk as she has paid over $17,000 and feels as if she is getting nowhere. IRS applied most payments to 2010 so 2009 kept accruing higher interest and penalties. She thought that wasn't right but did nothing. I don't think I can have that changed either, can I?

It's sometimes hard not to feel for clients who get into these morasses. She knows it's her fault but out of ignorance and it hurts to hear that ignorance is no excuse. Plugging away...

Thanks again for input.

[Terry D EA]

Margaret this definitely sounds like an after tax season project. Don't forget the possibility of an OIC once the mess is cleaned up. The IRS interest clock runs to the point of no return with some clients and they can't see any light at the end of the tunnel. I have a client that we will be looking at a possible OIC after season. Their comment of going to their grave owing the IRS well in the five digits after trying to pay for 20 or so years is what prompted my offer to look into this. A tax debt owed to the IRS that is impossible or seems impossible to get ahead of is worse than any credit card debt ever.

 

I do agree with the 3115. Make sure you get paid for all of this as well. If you're like me, my heart gets in the way when it comes time to collect my fees with some of these clients. While I know you should never feel bad about your fees sometimes it is hard when you want to help.

Edited March 28, 2015 by Terry D

[joanmcq]

SOL on the IRS collecting is 10 years, barring anything that causes the tolling to be suspended. So no one is going to pay for 20 years. So it might be better to be paying on 2010 rather than 2009.

Get 2011 done, and extend the rest.

Are any of the assets ones that would fall under the de minimus election?

Edited March 29, 2015 by joanmcq

[Margaret CPA in OH]

I've decided to amend 2011 considering the assets from 2009 as expenses under Section 179 even though they were put under office expense. Bottom line is the same and 2009 is out of sol. Some assets like the computer and graphic software are over $1000 each but would have been Sec. 179 anyway. I will review in detail the 2012 and 2013 for any other fixed assets. It may be there is only the cell phone which I saw listed although TT carried over $534 from ex's 2007 or earlier return depreciating unknown assets.

If no assets and supplies are under the limit, file the safe harbor election and skip 3115. This summer prepare amended 2012 and 2013 to see what the real returns should be. Discuss OIC. She cannot possible pay all this. IRS has been applying payments to 2010 not 2009. Neither of us know why but doubt it can be changed.

Thanks again to all considering this with me. I may come back about the OIC. The whole thing looks hairy especially with the high application fee and possibility of denial. I just wonder if they have ever gone after the ex. Grrrr....