23 years without filing - How far back?

[BulldogTom]

OK, phone rings while I am waiting for a BK client to arrive. Guy asks "Are you a tax attorney?".

I should have said no and hung up right there, but silly me, I ask why he thinks he needs a tax attorney.

"I have not filed in a loooong time and the California Tax Board or whatever they are called is gonna take my paycheck next week."

So we talk for a while. Turns out he is 60 years old, makes $12/hour working construction. Has had multiple employers over his lifetime. Is not sure if he was ever self employed or not. Is not sure where his records are. I thought he was going to bail when I asked for a fairly good sized retainer, so I gave him some pointers on what to ask the next guy he called. Turns out I did not scare him away.

I have an idea on how to represent this guy ($12/hour in my part of the country is not much and that should buy some time). I will get the first 3 returns done in case there are any refunds to go after, then start working backwards. The question is, how far do we go back? I am thinking 5 years (if his records look good on those, then I will send him back to look for more, but when he starts pulling numbers off the ceiling, then I think it is time to stop).

What do you think? Thanks in advance.

Tom

Lodi, CA

[JohnH]

Think it might be cheaper if he just moved to Canada?

[jainen]

>>why he thinks he needs a tax attorney<<

He needs a tax attorney because he hasn't filed for 23 years. That puts him deep into felony territory, and at least one taxing authority is hot on the chase. He has already told you things that need more privilege than you can offer, so please don't ask him anything else.

[ADGFINANCIAL]

Was this 1099 or W-2 income? If it's W-2 income might not be as serious as you think. They most likely owe him for those back years. I'm working 2 of thses cases right now. Put in a Form 4506-T and find out all the income that the IRS has on file and work the case. If it's 1099's then I'm surprised that they haven't put lien's and attached his wages long ago. I would suggest just working the current years and see how that goes. If indeed it is 1099 income he will need a lawyer. August

[joanmcq]

The problem with the IRS records is they don't have state withholding. And I doubt CA has it that far back. So unless you've got W-2s showing the w/h, he's up a creek for CA. Although filing whatever he's got can't hurt.

[kcjenkins]

Tom, six years is all they normally ask for, or want, unless huge sums of money are involved. My guess, a fairly educated one based on my years in this game, is that the reason he never got a letter before, given he's been largely a W2 income guy, is that he had refunds coming most of those years. It's only when they owe, based on what was reported, that the feds bother to contact the t/p. CA, of course, is more aggressive, since they have penalties that do not rely on owing before they kick in, unlike the feds.

I'd follow your plan, do the most recent three, to lock in any refunds, then go back three more, at most. If the three show refunds, you might not even need to bother with the older three.

[rick in cal]

Tom, I have done multiple year returns and without disputing what KC said about six years, I have had cases that involved 10 and 12 tears. The later was brought to me by someone who was preparing to do an offer with a tax attorney. I prepared four years using all of his deductions and did eight years of short forms. All of his earned income was w-2 income and his income was probably higher each year than your clients. Don't worry to much about Ca taxes, if he was working for wages and having any taxes at all with held he's fine. As for your fees, I would bill for those first three years and get paid then bill and release in two or three year increments.

[BulldogTom]

Thanks for all your answers. You are confirming my thought process. I have not seen his records yet, he is supposed to bring them to me next week. I suspect he is mostly W2 with an odd 1099 thrown in. I also suspect the tax withholding will cover the majority of the taxes due. So it comes down to a penalty fight, and the best you can do is ask for mercy.

BTW, I am in Nashville TN and was looking for the advertising for Betty and Jerome. I would love to ask them what they would do, and maybe get a haircut and oil change at the same time. I will be here until Friday, so if you can get in touch with them, tell them to post their business address.

Tom

Lodi, CA

[jainen]

>>it comes down to a penalty fight<<

Well, Tom, either you are too naive about FTB and IRS power or else I am too paranoid about it. If you are right and you follow my advice anyway, everything will be fine. But if I am right and you go the other way, the catastrophe could easily drag the tax preparer in.

FTB already has their hooks in this guy. If you stand up to them they just might decide 23 years is blatant enough to make a point about under-reporting in the construction industry, always a favorite target. By then you will have his records, and you can't prevent them taking your file.

[Lion EA]

Jainen makes some good points, especially about CA that I know little about. But, I have had a couple of clients who hadn't filed for many years and were being chased by the IRS. For one of the couples, some of the years involved SE construction; then he got hired as an employee for later years. The IRS wanted six years before they'd accept a payment plan. I did what you mentioned, filed three open years first, getting paid for each one before moving on to another. After those, went back six years and moved forward a year at a time after they paid and picked up. I tried not to have more than one year of their information at a time, but spouse would uncover things and deliver to me as she found them. They were anxious, but then slow to pick up. Ended up with some early NOLs, so had to amend years already done. Eventually found out they were filing returns but not sending in any money at all, ever. And, the spouse wouldn't change her withholding from almost nothing to something reasonable. So, when they sold their house and bought a new one, IRS got justifiably upset and seized a bank account. Couple was very upset, but they'd had lots of warning letters that they hadn't shared with me. I didn't bother telling them when I went out on my own last season. Let them whine to someone else about how poor they are.

[BulldogTom]

>>it comes down to a penalty fight<<

Well, Tom, either you are too naive about FTB and IRS power or else I am too paranoid about it. If you are right and you follow my advice anyway, everything will be fine. But if I am right and you go the other way, the catastrophe could easily drag the tax preparer in.

FTB already has their hooks in this guy. If you stand up to them they just might decide 23 years is blatant enough to make a point about under-reporting in the construction industry, always a favorite target. By then you will have his records, and you can't prevent them taking your file.

Your points are well taken. I understand the mess that blatant fraud can make. My gut feeling is the tp is just afraid. The problem has snowballed and he kept running from it instead of taking care of it. If I can be of assistance in putting him on the right track, I will. If the IRS and CA are really seeking fraud, I will definately send him to an attorney (perhaps Joel is reading this). But I will make the first contacts and see if the IRS and CA will look at giving him some time to get the returns together and in, and from that first conversation, I should be able to judge their intentions and make the appropriate decisions.

My dealings with the IRS in the past normally are good if the service believes the taxpayer truly is working to make everything right. CA is not always so forgiving, but in general will give a taxpayer one opportunity to get everything on track.

Thanks for your comments Jainen. You know I value what you post, even if I don't always agree with it.

Tom

Nashville, TN (for 2 more days)

[joanmcq]

I'm on hold with the FTB right now. Client got bills for years he didn't file; he was on disability after going through a divorce and didn't have a filing requirement. From a contact at FTB I learned they had sent out requests for returns and had filed their version of an SFR.....on the basis that he had a cosmetology license during that time, and they estimated how much the average cosmetologist makes. Checked w/the IRS and there was $316 in an IRA and $25 of interest. Most letters sent came back undeliverable.

[jainen]

>>the mess that blatant fraud can make<<

I'm sure all tax professionals are clear about fraud (unfortunately, not always of the same mind). A more difficult question is the willful failure to file. It seems to me "he kept running from it instead of taking care of it" is a pretty solid statement of that crime.

Of course, proof is more difficult still. Most likely FTB will not put out any extra effort for a taxpayer who is trying to comply and even making payments (albeit by levy). But sometimes things go wrong despite our best efforts. So here's a little survey about my point of view.

When there is any kind of tax problem, who will the client blame?

a ) himself

b ) his partners or employers

c ) his finance or legal guy

d ) his tax guy.

[joelgilb]

>>why he thinks he needs a tax attorney<<

He needs a tax attorney because he hasn't filed for 23 years. That puts him deep into felony territory, and at least one taxing authority is hot on the chase. He has already told you things that need more privilege than you can offer, so please don't ask him anything else.

More likely they will go after him in a civilly suit rather than criminally. And if they have started going after him civilly unlikely they will switch.

[joelgilb]

>>it comes down to a penalty fight<<

Well, Tom, either you are too naive about FTB and IRS power or else I am too paranoid about it. If you are right and you follow my advice anyway, everything will be fine. But if I am right and you go the other way, the catastrophe could easily drag the tax preparer in.

FTB already has their hooks in this guy. If you stand up to them they just might decide 23 years is blatant enough to make a point about under-reporting in the construction industry, always a favorite target. By then you will have his records, and you can't prevent them taking your file.

Jainen, I think you are being overly paranoid. As a tax attorney I get these all the time. Big question though is how far back to go. Not sure about CA, but IRS can be as little as 5 years to as much as all the missing returns.

A lot depends on what needs to be negotiated after the returns are prepared. For instance with IRS, if it becomes necessary to set up payment plans or an Offer in Compromise, IRS often requires that all mssing years be filed. I have even had to file years where the return was ZERO, just to get the IRS OIC division to negotiate.

Start with the most current years and then work backwards as CA requires. Also talk with the CA Franchise Board. They will likely tell you what they are looking for and may even have information to help you file.

As for IRS providing CA withholdings, others here are correct, IRS will not be able to provide this. If CA can not or will not provide this, you may be able to estimate it by calculating it from their rate tables and showing them the calculation. I have successfully done this with Illinois.